Annual Report 2004 Transport in Hong Kong > Grow in Mainland China and Capture Opportunities in Europe by Building on Our Core Competencies

MTR Corporation Limited

Vision To be a world class enterprise, growing in Hong Kong

Annual report Annual report and beyond, focusing on rail, property and related businesses Mission > Provide excellent value to our Customers, enhancing

2004 their quality of life, and contributing to development of the communities in which we operate

> Provide opportunities for employees to grow and prosper with the Company and reward our investors

> Develop the rail network as the backbone of public Annual report 2004 transport in Hong Kong > Grow in Mainland China and capture opportunities in Europe by building on our core competencies

Onwards, Upwards and Outwards MTR is always on the move > to new ways of thinking and delivering our services > to higher levels of operational and financial performance > to a world of business opportunities at home and abroad

MTR Corporation Limited MTR Tower, Telford Plaza, Kowloon Bay, Hong Kong GPO Box 9916, Hong Kong Telephone (852) 2993 2111 Facsimile (852) 2798 8822 www.mtr.com.hk MTR Corporation Limited

Vision To be a world class enterprise, growing in Hong Kong

Annual report Annual report and beyond, focusing on rail, property and related businesses Mission > Provide excellent value to our Customers, enhancing

2004 their quality of life, and contributing to development of the communities in which we operate

> Provide opportunities for employees to grow and prosper with the Company and reward our investors

> Develop the rail network as the backbone of public Annual report 2004 transport in Hong Kong > Grow in Mainland China and capture opportunities in Europe by building on our core competencies

MTR Corporation Limited MTR Tower, Telford Plaza, Kowloon Bay, Hong Kong GPO Box 9916, Hong Kong Telephone (852) 2993 2111 Facsimile (852) 2798 8822 www.mtr.com.hk 1ST PAGEPROOF 25 years of serving 02 Mar 2005

Hong Kong and beyond 1995 > The Agreement for the Design, 1999 Construction, Financing and Operation > Completion of Maritime Square of the Airport Railway was signed with and Tierra Verde at Tsing Yi Station the Government. marked the creation of our “second > The landmark 88-storey Two generation”integrated developments. International Finance Centre, Hong Kong’s > The first consultancy assignment tallest and most prestigious office building was signed in China for training 2000 was completed,adding to MTR’s investment services to the Guangzhou Metro for > In October, the successful initial and property management portfolio. a period of four years. public offering of MTR shares attracted 1985 a total demand of over HK$160 billion > On 31 May, the Island Line 1997 from retail and institutional investors operating from Chai Wan Station > MTR and other transport firms in Hong Kong and overseas.This to Admiralty Station commenced launched the Octopus Contactless represented an oversubscription of service and the then Governor, Smart Card, which has since become 17.4 times for a HK$9.4 billion offering Sir Edward Youde, officiated at the the most popular payment method on and created a shareholder base of over 1980 opening ceremony. public transport and for an increasing 600,000 at the time of listing. 2004 range of day-to-day expenses. > The full Modified Initial System (from > On 24 February, the Government Central Station to Kwun Tong Station) 2002 announced its decision to invite the was opened seven weeks ahead of > The Hong Kong SAR Government Company and KCRC to commence schedule and Her Royal Highness announced a feasibility study on a discussions on a possible merger for Princess Alexandra officiated at the possible merger between the which a joint report was submitted to opening ceremony on 12 February. Company and KCRC in June. the Government on 16 September.

1975 > Completion of Telford Gardens and 1986 > The re-development of MTR > In July, the Company signed the > The Company entered into an Agreement > Mass Transit Railway Corporation Telford Plaza I above Kowloon Bay > The last section of the Island Line Corporation Headquarters Building project agreement with the Government in Principle for a Build-Operate-Transfer was established on 26 September to Station and Depot, marked the was opened on 23 May. and development of Telford Plaza II for the design, construction, financing project with the Shenzhen Municipal build and operate a mass transit creation of MTR’s “first generation” above Kowloon Bay Station and Depot and operation of the Disneyland Resort People’s Government for Phase 2 of Line 4 railway system for Hong Kong, based integrated railway and property were completed. Line (then Penny’s Bay Rail Link) to and to operate the whole of Line 4 of the on prudent commercial principles. developments, and the start of our serve the future Hong Kong Disneyland. proposed Shenzhen Metro System. management of MTR properties along Construction started in the same month. 1998 > The Company entered into an Agreement Kwun Tong and Tsuen Wan lines. > The Tung Chung Line was opened 1979 > The Tseung Kwan O Line, the in Principle to form a Public-Private- on 22 June, extending MTR services to > On 30 September, the then Company’s fifth MTR line, officially Partnership with Beijing Infrastructure Lantau Island through West Kowloon Governor, Sir Murray Maclehose, 1982 commenced service four months Investment Co. Ltd and Beijing Capital > The Tsuen Wan Line was officially and Tsing Yi. officiated at the opening ceremony 1988 ahead of schedule on 18 August, Group for the investment, construction opened on 10 May, seven months of MTR. The then Modified Initial > The Company secured its first > On 6 July, the Airport Express began providing an efficient and reliable train and operation of the Beijing Metro Line 4. ahead of schedule and considerably System (now part of the Kwun Tong long-term credit ratings from service, transporting passengers service to residents of the Tseung below budget. The then acting > MTR achieved patronage volume of 2.72 Line) commenced public service on Moody’s and S&P,at par with between the Hong Kong International Kwan O district. Governor, Sir Philip Haddon-Cave, million on 17 December, the highest 1 October and carried 285,000 the sovereign ratings of the Hong Airport at Chek Lap Kok and Central in officiated at the opening ceremony. recorded on a single, regular 19-hour passengers on the first day of Kong Government. 23 minutes. operation. service day, and a record Christmas Eve 1984 1989 patronage of 3.38 million passengers. > The Company obtained its first > The Eastern Harbour Rail crossing > In December, MTR was awarded the short-term credit ratings from was opened on 5 August, providing “Good People Management Award Standard & Poor’s (S&P) and Moody’s, passengers a much-needed 2004” by the Hong Kong Labour an important recognition that helped alternative for crossing Victoria Department.This is the third consecutive access funding from the international Harbour. 2003 time the Company has won this award, capital markets. > In November, the Company signed > The MTR Art in Stations programme an achievement that testifies to MTR’s the overall project agreement with the > MTR and Kowloon-Canton Railway was launched to enhance the outstanding achievements in good Government for the Tung Chung Corporation (KCRC) joined hands to travelling environment for passengers management practice and the successful Cable Car, which will link Tung Chung launch Common Stored Value Tickets and promote local arts. labour-management partnership over with Ngong Ping and the nearby Big in mid-October. 25 years. Buddha Statue and Po Lin Monastery, creating a major new tourist and leisure landmark. Designed by Sedgwick Richardson Editorial by Conatus Limited Limited Designed Sedgwick by Richardson Conatus by Editorial 1ST PAGEPROOF 25 years of serving 02 Mar 2005

14 Executive management’s report 14 > Railway operations 24 > Station commercial & other businesses 26 > International expansion 30 > Property business 40 > Future Hong Kong projects 44 > Human resources

47 Financial review 54 Ten-year statistics 56 Investor relations 58 Sustainability 59 Corporate governance 62 Board and Executive Directorate 65 Key corporate management 66 Report of the Members of the Board

73 Contents of accounts and notes 74 Auditors’ report 75 Consolidated profit and loss account 76 Consolidated balance sheet 77 Balance sheet 78 Consolidated statement of changes in equity 79 Consolidated cash flow statement 80 Notes to the accounts 136 Unaudited supplementary information for US bond holders 140 Glossary contents 2 Milestones 2004

January • Caring Company Award 2003/04 from the July > The Secretary for Environment,Transport Hong Kong Council of Social Service. > The MTR Safety Web Game was launched and Works presented commendation letters • 2003 Eco-Business Gold Award for “Best to highlight MTR safety messages in an easy to MTR staff in recognition of their handling Environmental Reporting”from Hong to understand and attractive way for of the arson attack on board an MTR train. Kong Environmental Campaign Committee. youngsters, as part of the annual Passenger Behaviour Education Programme organised > The Group successfully launched a March to focus public attention on the importance US$600 million 10-year bond with near > The Company submitted to the of safety and courtesy on the MTR. three times over-subscription. Government a revised proposal for the new > Renovation of retail zone was completed > The Company entered into an Agreement West Island Line and South Island Line to in Tsuen Wan Station. in Principle for a Build-Operate-Transfer provide service to the western and southern project with the Shenzhen Municipal parts of Hong Kong Island. August People’s Government for Phase 2 of Line 4 April > Rail Sourcing Solutions (International) and to operate the whole of Line 4 of the Limited was established as a wholly-owned > The launch of the MTR 25th Anniversary proposed Shenzhen Metro System. subsidiary, to expand into global railway Theme Train and a feature by the TVB “Hong supply and sourcing services. February Kong Superbrands” TV programme marked > A Ground Breaking Ceremony marked the the start of our 25th Anniversary promotion. official commencement of construction of > A new 60-metre interchange subway the Tung Chung Cable Car. linking the MTR and KCRC networks at > The Government announced its decision Kowloon Tong was opened. to invite the Company and the Kowloon- Canton Railway Corporation (KCRC) to May commence discussions on a possible > The Company’s Sustainability Report 2002 merger and submit a joint report. was named the first “Best Sustainability Report in Hong Kong”by the Association > The Company won several awards: of Chartered Certified Accountants in Review 200: Asia’s Leading Companies – • recognition of its outstanding reporting and Hong Kong’s Top Ten Companies from commitment to corporate accountability the Far Eastern Economic Review. and transparency.

June > The Company awarded a contract to > An online shopping service was launched Rotem Company for the purchase of four on the MTR website, expanding the new 8-car trains for the Tung Chung Line to distribution network for MTR souvenirs and meet increasing demand. Airport Express tickets. > MTR won the Top Service Award 2004 – > Renovation of retail zone was completed Public Transport presented by Next in Tai Koo Station. Magazine, for the sixth consecutive year. September > The Company won the “Most Innovative > The Company, together with KCRC, Award“ for Excellence in Training 2004, from submitted a joint merger report to the Hong Kong Management Association. Government. > Renovation work of the retail zone at > A new entrance at MTR Tsim Sha Tsui Choi Hung Station was completed. Station connecting to the newly completed Tsim Sha Tsui Interchange Subway (Mody Road section) was opened for public use to MTR 25th Anniversary Theme Train facilitate passenger transfer between Tsim MTR CORPORATION LIMITED ANNUAL REPORT 2004 3

Sha Tsui Station and KCRC’s East Tsim Sha number of noticeable incidents causing > Expressions of Interest and tenders were Tsui Station. train service delays. invited for Package One of Area 86 in Tseung Kwan O. Area 86 will become one of > The MTR Safety Carnival was organised as > The Company won a “BEST Award” the most integrated, high quality housing part of the Company’s ongoing effort to from the American Society for Training developments in the world, housing up to promote safety awareness among and Development, for the second 58,000 people in 21,500 flats. The package passengers and to enhance understanding consecutive year. was awarded in January 2005 to a subsidiary of safety equipment. > AEL extended its sales channels and of Cheung Kong (Holdings) Limited. started in-flight ticket sales on all inbound > MTR’s LYNX Concrete Cube Test System Cathay Pacific flights. was awarded the Certificate of Merit in November the Industrial Applications Category of the > The Asia Pacific PR Awards organised by Asia Pacific Information and Communications Media magazine gave MTR the highest Technology Awards 2004 given by award in the Specialist & Technique – Crisis APICTA Network. Management category in recognition of the Company’s rapid and effective communications during the arson incident in January, which turned a potential crisis into an opportunity > Membership of MTR Club expanded to to strengthen public understanding of the over 300,000. safe design of the MTR system and to boost the Company’s image. October > A series of activities, including a lucky > The Company signed an agreement with draw, station decoration at Hong Kong high-speed train company Great North Station and anniversary supplements was Eastern Railway Holdings Limited to form a launched to celebrate the 25th Anniversary joint venture to bid for the new Integrated of railway operation. Kent Franchise in the UK. > The Company’s “Art in MTR – living art” December series kicked off, dedicating Central Subway to live performances every Friday evening as > The Company received for the third part of its mission to promote appreciation of consecutive time the 2004 Good People the arts and encourage the development of Management Award from the Hong Kong artistic talent in Hong Kong. Labour Department in recognition of its good people management practices, > The Company won the Superbrands making it the only company to achieve Award – Infrastructure Products and Services, this record. from Superbrands Ltd. for the second consecutive year since the awards’inception. > Occupancy rate of MTR’s 18 floors in Two IFC, also known as “Central 18 Zone > The Company appointed leading at Two IFC”reached 100% after UBS AG international rail expert, Lloyd’s Register Rail, > The Company entered into an Agreement committed to leasing the remaining and a high-level internal task force, in Principle to form a Public-Private- available office space. respectively to comprehensively review the Partnership with Beijing Infrastructure Company’s service performance and asset Investment Co. Ltd and Beijing Capital management regime, and to seek Group for the investment, construction and operational improvements following a operation of the Beijing Metro Line 4, a major transport infrastructure project for China’s capital. 4 Chairman’s letter

Dear Stakeholders, September we jointly submitted to the Government a merger proposal. The I am pleased to present to you the proposal addresses positively the five results of MTR Corporation Limited parameters laid down by the (MTR) for 2004, the 25th Anniversary of Government whilst providing a commencement of MTR’s rail services in blueprint for integrating the two railway Hong Kong. operations to create a single, world-class railway network for Hong Kong. Those The 2004 results reflect a heartening five parameters are: an objective and turnaround from the SARS buffeted transparent fare adjustment mechanism; 2003. Our satisfactory performance was abolition of transfer charges; fare underpinned by a broad based reduction; job security for frontline staff; economic recovery, driven by tourism, and provision of seamless interchange. positive consumer sentiment, waning deflationary pressure and steadily Upon submission of the joint proposal, improving property prices. During the the Company began negotiations with year, the Company recorded total the Government on the terms of the turnover of HK$8,351 million, an increase possible merger, which has continued of 10.0% over the previous year, with net into the new year. MTR believes that profit rising by 1.0% to HK$4,496 million. deal terms can be reached that would Net profit in 2003 included a large book benefit all stakeholders, including profit recorded on the receipt of 18 floors customers, the Government, in Two IFC. shareholders and staff of both MTR and KCRC. A well executed merger would In February, the Government requested create a world leading mass transit cum the Company and the Kowloon-Canton property development enterprise, Railway Corporation (KCRC) to begin providing greater convenience, better merger discussions. As I indicated in my connectivity, higher operational and letter to you in the 2004 Interim Report, financial efficiency and compelling we worked hand in hand with KCRC international competitiveness. to move matters forward. Thanks to the cooperative and mutually In 2004, we took significant steps supportive manner in which forward in implementing the Company’s discussions took place, in expansion strategy outside Hong Kong. In January, MTR signed an Agreement in Principle with the Shenzhen Municipal People’s Government to construct Phase 2 of Line 4 in the Shenzhen Metro System and to operate the whole line for a period of 30 years following completion of Phase 2. The project will MTR CORPORATION LIMITED ANNUAL REPORT 2004 5

also include property development rights Our offshore expansion strategy Community service is part of MTR’s fabric. of an aggregate gross floor area of 2.9 complements the Company’s continuing Two ongoing programmes are million square metres at stations and the interest in extending the MTR network in noteworthy, namely,“Art in Stations” depot along Line 4. Negotiations on the Hong Kong. The Disneyland Resort Line which sponsors local artists and students Concession Agreement and related and the Tung Chung Cable Car projects to display and perform art in our stations, agreements with the Shenzhen are on track, whilst we are engaged in and the promotion of healthy living. The authorities are progressing, albeit at a earnest discussion with the Government latter, which, among other things, slower pace than originally anticipated, on proposed projects such as the West encourages walking as a form of daily due to the measures implemented by the Island Line (WIL) and South Island exercise, will be highlighted by an Annual Central Government to dampen Line (SIL). Race Walking event beginning in 2005. overheating aggregate demand. The wider responsibilities of MTR to our Although Hong Kong was not directly In December, the Company signed an stakeholders and society were high on affected, we were all touched by the Agreement in Principle with Beijing our agenda in 2004. Full details of the human sufferings and tragedies that Infrastructure Investment Co. Ltd. and Company’s achievements in this area are followed in the wake of the Indian Ocean Beijing Capital Group, both subsidiaries of given in our Sustainability Report, which tsunami. MTR, by working with our the Beijing Municipal People’s adheres to Global Reporting Initiative employees, passengers, commercial Government, to form a Public-Private- (GRI) guidelines. The Report was included tenants and affiliates, accounted for over Partnership (PPP) for the investment, in the GRI’s top 100 reports and named $2 million of relief funds raised to date. construction and operation of the Beijing Best Sustainability Report by the We are deeply grateful to all those who Metro Line 4 project for a period of 30 Association of Chartered Certified have cooperated with us in this years. MTR will own 49% of the PPP Accountants (ACCA). In addition, in late humanitarian endeavour. company, which will be responsible for 2004 we began the development of a Finally, I would like to thank my Board providing the electrical and mechanical new Enterprise-Wide Risk Management colleagues, management and all staff for systems including trains, and for running System to help better monitor and track their sharp, conscientious work, the line upon completion of the project. risks and best practices across our dedication and focus on excellence, Based on this PPP model, land acquisition businesses. We also enhanced and which contributed to the successes of our and civil construction of the project will strengthened our processes to engage 25th Anniversary Year. As MTR drives into be financed by the Beijing Municipal community stakeholders through the future, I am confident we can build on People’s Government. In February 2005, extensive consultations on the proposed the strong legacy of this quarter century together with our partners, we initialled WIL and SIL, and by establishing a and continue being caring, innovative, the Concession Agreement for the Sustainability Advisory Board for the Tung visionary and profitable. franchise with the Beijing Municipal Chung Cable Car project. The Company People’s Government and the related continued to apply our tried and true rail agreements, and now await approval plus socially responsible property from the National Development and development business model, codes of Reform Commission. conduct, training and best governance practices to our projects abroad and We are encouraged by business actively supported international opportunities in Europe, particularly the initiatives to enhance enterprise UK, where we are pursuing operating Dr. Raymond Ch’ien Kuo-fung, Chairman sustainability. franchise contracts. In November, we Hong Kong, 1 March 2005 signed a joint-venture agreement with MTR persistently maintains a high the Great North Eastern Railway Holdings standard of corporate governance and Limited to bid for the Integrated Kent financial disclosure. We were once again Franchise in southeast England. We are recognised by the Hong Kong eyeing a similar opportunity in the Management Association (HKMA), which Thameslink / Great Northern Franchise, gave us the Silver Award in the General which serves London north and south of Category in the 2004 Best Annual Report the River Thames. Awards Competition. This marks the 16th consecutive year of award winning for MTR. 6 CEO’s review of operations and outlook

Dear Stakeholders, The Company’s favourable performance produced good financial results in I am pleased to report that MTR’s 2004. MTR recorded total revenues of operational results for the year 2004 HK$8,351 million, an increase of 10.0% experienced a dramatic rebound over over the previous year while operating 2003, a year when our operations were profit before property development, severely impacted by the weak economy, interest and depreciation improved by soft property prices and, most significantly, 21.3% to HK$4,546 million. With property the outbreak of SARS. development profit of HK$4,568 million recognised for the year, a reduction of The strong operational results achieved in HK$801 million from 2003, net profit 2004 were brought about by a broad improved marginally by 1.0% to based economic recovery in Hong Kong HK$4,496 million. However, earnings per which also led to a significant increase in share decreased slightly by 1.2% to property prices. The Company has HK$0.84 as more shares were issued managed this recovery well. Growth in during the year. The Board recommended patronage led to significant fare revenue a final dividend of HK$0.28 which increases. Growth in non-fare revenues together with the interim dividend of was even stronger, propelled by buoyant HK$0.14 brought the full year dividend to station businesses and improved rental HK$0.42, the same as last year. rates for our investment properties. Property development profit also Review of operations exceeded our earlier expectation, After a sharp rebound in patronage from although it was lower than the very high SARS in the second half of 2003 property development profit recognised in passenger growth continued through 2003 on receipt of our 18 floors in Two IFC. 2004, assisted by the economic recovery in Hong Kong, an increase in tourist arrivals from the Mainland, and the opening of our West Rail interchanges in December 2003. Total patronage for the MTR Lines increased significantly by 8.2% to 834 million. Airport Express (AEL) also saw a strong recovery, with total patronage rising 17% to reach 8.0 million, following an increase in air passenger traffic at the Hong Kong International Airport. MTR CORPORATION LIMITED ANNUAL REPORT 2004 7

Our market share also improved with our to address passenger concerns, the various initiatives. As a result, our railway overall share of total franchised public Company set up a high-level internal task operating costs per car km during the transport rising to 24.8% from 24.3% in force to seek operational improvements. year fell by 1.8% to HK$22.1. 2003, while our cross-harbour market We also commissioned an independent Our station commercial and other share increased to 59.6% from 58.7%. The study by Lloyd’s Register Rail, a leading revenues benefited significantly from the Company’s estimated market share of international rail expert and validation economic recovery and strong rebound passengers travelling to and from the agency, to conduct a comprehensive in consumer spending, growing by airport decreased from 23% to 21%, review of our assets and asset 17.4% to HK$1,311 million. The partly due to a change in the mix of management practices. substantial increases in advertising and visitors arriving at and departing from Following the conclusion of the internal telecommunication income were Hong Kong’s airport. task force investigation in November, we particularly noteworthy. Our strategy to The increases in patronage and market have begun implementation of a series of upgrade advertising facilities and share were supported by the continuing improvement initiatives to augment our introduce new formats, such as the high quality of service. In 2004, our maintenance regime and incident trackside plasma TV network introduced customer service performance continued handling procedures. The Lloyd’s Register during the year, has proved most to surpass both the Government’s Rail report was received in early February effective and boosted advertising requirement under the Operating 2005. The report’s recommendations are revenues by 21%. The station renovation Agreement and our own more stringent constructive and useful. We will study the programme to add more space, vibrancy Customer Service Pledges. In fact, during report in detail and set up the necessary and a better trade mix to MTR stations the year, statistics measuring MTR organisations and processes to also helped improve station performance were among the best on implement the recommendations commercial revenues. record at MTR. The number of journeys expeditiously whilst at the same time In telecommunications, MTR became experiencing a delay of five minutes or taking immediate action to address some one of the first rail networks in the world more showed a 25% improvement over of its recommendations. We are to be 3G enabled as we successfully 2003. MTR passenger journeys on time encouraged to note that the report did upgraded our existing integrated radio were 99.9%, supported by 99.9% not find any evidence to suggest MTR system on the Island Line to support reliability for train service delivery, which assets are declining as the system enters UMTS based 3G service. Our fixed-line were amongst the best in the world. In its 25th year of operation and our asset subsidiary TraxComm began operation January, MTR employees won extensive management system is recognised to be and management of a 50 Gigabit praise for their rapid and effective in line with international best practice. bandwidth network, serving a number of response to an arson attack on an Urban Nevertheless, both the Board and telecommunication service operators in Line train, by resolving the incident management are committed to ensuring Hong Kong. quickly, thus preventing injury to our that the Lloyd’s Register Rail passengers and employees, and allowing recommendations are effectively With the economic recovery, further us to resume normal service swiftly. implemented to ensure that the people increases in the number of service of Hong Kong continue to enjoy a safe, providers and a rise in average daily Regrettably, a number of noticeable reliable and efficient mass transit service usage of the Octopus card, pre-tax profit incidents in the latter part of the year had that they can be proud of. contribution from Octopus Cards Limited given rise to public concerns over the increased significantly by 91.3% over reliability of our system. Based on the MTR continued to seek improvements in 2003 to HK$44 million. principle of continuous improvement and efficiency and productivity through 8 CEO’s review of operations and outlook

MTR has for some time been active Albany Cove of Caribbean Coast, and Property rental and management income overseas in external consultancy and this Residence Oasis. We and our property increased by 12.1% to HK$1,108 million. work currently extends to contracts in 22 developers sold or pre-sold 3,554 units in This was mainly the result of higher rental cities in 11 countries. During 2004 we 2004. As a result, profit from property income from Two IFC, arising from a faster made the strategic decision to reorient development was HK$4,568 million. than expected commitment by tenants this business to refocus on service The main contributions to property at higher rents, together with strong contracts which are larger and of longer development profit came from sharing in performance in all four shopping duration, and which are likely to lead to kind in respect of the Union Square retail centres and an expanded portfolio of investment opportunities. This refocus shell structure at Kowloon Station, managed properties. has already led to an improvement in recognition of deferred income relating Another notable achievement by the consultancy profitability. to the Caribbean Coast and Coastal Company during the year was the launch Skyline developments at Tung Chung On future Hong Kong projects, we made of our revised Vision, Mission and Core Station and The Harbourside at Kowloon significant progress on the construction Values. These statements of strategic Station, and share of surplus proceeds of Disneyland Resort Line (DRL), formerly intent and values will now guide us into from Residence Oasis at Hang Hau known as the Penny’s Bay Rail Link, which the future as the Company continues to Station in Tseung Kwan O and The will connect Hong Kong Disneyland with grow our business in Hong Kong and Harbourside at Kowloon Station. the Tung Chung Line, and are confident beyond. However, this high level of property of meeting the target completion date of development profit was, as forecasted, 1 July 2005. The Tung Chung Cable Car Financial performance lower than that achieved in 2003 which project, our major new tourist attraction The financial results for 2004 reflected an was favourably impacted by the receipt project for Hong Kong, is also on track all round improvement in every aspect of of 18 floors in Two IFC. for completion by early 2006, following our businesses. Total fare revenue for the the start of construction work in In Tseung Kwan O, following approval in MTR Lines amounted to HK$5,417 million, February 2004. August 2004 for a substantial improvement a 7.0% increase over 2003, while that from to the Master Layout Plan for the “Dream AEL increased by 21.2% to HK$515 million. In February, we put forward our proposal City”at Area 86, developers were invited Taking into account non-fare revenue to the Government to extend the to tender for Package One of Area 86 in including property rental and management Kwun Tong Line from Yau Ma Tei Station December. The package was ultimately income which in total rose 14.9% to to the popular residential area of awarded to City Investments Limited, a HK$2,419 million, total revenue grew by Whampoa Garden. In March, following subsidiary of Cheung Kong (Holdings) 10.0% to HK$8,351 million. extensive consultations and much hard Limited, in January 2005. This was our first work, the Company submitted revised Despite a general increase in business development tender since October 2002. proposals on WIL and SIL to the activities during 2004, operating The tender invitation differed from our Government. All of these proposals are expenses were well contained with gains previous format as we offered to pay half currently under review by the Government. in productivity. This, together with the of the land premium in return for a higher write-back of a prior year revaluation With a buoyant property market in 2004, profit sharing ratio. This method allows us deficit for our self-occupied office MTR achieved highly satisfactory results to increase our profit participation in the property, led to operating expenses in our property businesses, as more development, albeit at slightly increased before depreciation reducing by 1.1% to developments were completed and sold. risk, whilst attracting a number of large HK$3,805 million. Consequently, Together with our property developers, and medium sized developers to the operating margin for the year improved we launched and achieved very strong tender. Elsewhere in Tseung Kwan O, the significantly to 54.4% compared with sales in developments at The Harbourside, Occupation Permit was issued for the 49.3% in 2003. Profit from property Carmel Cove of Caribbean Coast and 8 2,130-unit Residence Oasis at Hang Hau development was HK$4,568 million, a Clearwater Bay Road, as well as achieving Station in December, allowing us to reduction of HK$801 million from the good results from developments record profit from this development very significant property development previously launched for sale such as earlier than we had originally anticipated. profit recorded in 2003 when MTR Coastal Skyline, Monterey Cove and MTR CORPORATION LIMITED ANNUAL REPORT 2004 9

received our 18 floors in Two IFC. mindful of the associated business and through our project company, the right to Depreciation charges increased by 4.6% financial risks, as well as our responsibility construct Phase 2 and to operate the to HK$2,512 million from HK$2,402 million to create value for our shareholders. As entire Line 4. However, given the current in 2003, mainly due to a full year’s such, when evaluating and deciding on economic climate in China, it is possible depreciation on the West Rail Interchange these investment opportunities we that the necessary government and on new railway assets. Net interest will be guided by prudent commercial approvals, including that from the Central expenses decreased by 5.8% to principles that aim to deliver an Government, may take longer than HK$1,450 million mainly as a result of appropriate risk-adjusted return. originally anticipated. lower borrowing costs. The Company’s In Mainland China, our investment In December we signed a separate share of Octopus Cards Limited’s pre-tax strategy is focused on the major cities Agreement in Principle to form a PPP earnings was HK$44 million for the year. where the demand for mass rapid transit with Beijing Infrastructure Investment Co. After deducting income tax expenses of systems and hence potential for profit is Ltd. (BIIC) and Beijing Capital Group HK$700 million, the Group’s profit the greatest due to expanding (BCG), both subsidiaries of the Beijing attributable to shareholders for the year populations, heightened environmental Municipal People’s Government, for the was HK$4,496 million, a slight increase of concerns and increasing traffic investment, construction and operation 1.0% over 2003. congestion. We shall also adopt various of the Beijing Metro Line 4 for a period of In January, the Group took advantage of business models to meet the different 30 years. The total investment for this the favourable market and successfully market needs. In some cases, we can project is estimated at RMB 15.3 billion launched a 10-year US$600 million fixed repeat the very successful “rail and (HK$14.4 billion). Based on the PPP rate bond. The transaction not only property model”as used in Hong Kong, framework, the Beijing Municipal People’s enabled us to obtain cost-effective whilst in other cities we may choose a Government will fund 70% of the total fixed-rate long-term funds and to extend PPP model where Government funds project cost, comprising mainly land our debt maturity profile further, but also most of the capital expenditure. acquisition and civil construction, with established a new 10-year US dollar the remaining 30% funded by the PPP As reported last year, in January 2004 benchmark for Hong Kong’s quasi- company. This 30% will mainly consist of we signed an Agreement in Principle sovereign credits. As a result of the provision of trains and related electrical with the Shenzhen Municipal People’s attractive terms of our new financings and mechanical systems, costing Government to build, operate and and low interest rates prevailing during approximately RMB 5 billion (HK$4.7 transfer Phase 2 of Line 4 of the Shenzhen the year, we were able to reduce our billion), over 60% of which would be Metro System, and to operate the entire average borrowing cost further to 4.7% financed by non-recourse RMB debt. The line for 30 years when Phase 2 is from 5.1% in 2003. balance will be funded by equity completed. The total investment in this contribution from the PPP partners, of project is approximately RMB 6 billion Growth beyond Hong Kong which MTR will own 49%, with BIIC and (HK$5.7 billion). The project will be In the annual report last year, I discussed BCG owning respectively 2% and 49%. implemented based on the “rail and our strategy of seeking growth outside Hence our equity contribution to this property model”,with associated property Hong Kong. While Hong Kong will firmly project is estimated to be RMB 735 million developments of 2.9 million square remain our home market, we shall use our (HK$693 million). In February 2005, this metres of commercial and residential core capability as a world class rail project took another step forward when space along the railway. operator and property developer to MTR and its partners together with the capture business opportunities outside Since signing the Agreement in Principle, Beijing Municipal People’s Government Hong Kong with the objective of we have begun preliminary project initialled the 30-year Concession creating value for our shareholders and design and construction works as well as Agreement, which will become effective development opportunities for our staff. negotiations with the Shenzhen when approval from the National Municipal People’s Government on a Development and Reform Commission Whilst we see tremendous growth Concession Agreement and other related is obtained. opportunities overseas, particularly in the agreements which would give MTR, Mainland China and Europe, we are 10 CEO’s review of operations and outlook

In addition to these two major time, the Company has started discussion Outlook investment opportunities, the Company with the Government on terms of the Although the ongoing macroeconomic is in active discussions with parties possible merger. Our stance on the adjustments in Mainland China, the concerning other projects in Beijing, merger has always been that if properly recent sharp increases in oil prices and Shenzhen and Shanghai. structured and on acceptable terms, it the US Federal Reserve’s decision to benefits all our stakeholders. tighten monetary policy have all aroused In contrast to Mainland China, our concerns, on balance we are cautiously expansion strategy in Europe can be People optimistic about Hong Kong’s business characterised as “asset light”. We will seek MTR’s performance is the achievement outlook in 2005. We expect economic to enter into joint-venture partnership of our people. It is their dedication and conditions in Hong Kong to continue to with experienced local firms to bid for professionalism that took us through the improve albeit at a slower rate of growth operation and maintenance franchises difficult year of 2003 and the challenges than in 2004. and contracts, as deregulation of railway in the eventful but rewarding 2004. industries in Europe continues to unfold. Our rail business should be positively Our initial focus will be on the highly During the year, we continued to work impacted by the opening of the new deregulated UK market. hand in hand with our people, creating lines, including the Disneyland Resort opportunities for their development Line and KCRC’s Ma On Shan Rail, but this In November, the Company signed a and growth, including tailor-made will be partially offset by the opening of joint-venture agreement with the UK’s training programmes. Open and clear KCRC’s Tsim Sha Tsui Extension in October Great North Eastern Railway Holdings communications with employees was of 2004. Our station commercial and related Limited to jointly bid for the Integrated paramount importance in 2004, as we businesses should continue to benefit Kent Franchise in southeast England. sought to align the new Vision, Mission from improved economic activities in Since December we have been working and Core Values with all of our people in a Hong Kong. to pursue a similar opportunity in series of workshops and continued to Thameslink / Great Northern Franchise, Our property rental and management keep them abreast of developments which serves London north and south of business will benefit from Two IFC being surrounding the possible merger. the River Thames. Although we believe fully leased. In our property development that our two consortia have competitive We again received considerable business we expect that over the next advantages in their respective bids, as recognition for our achievements in our two years, the bulk of such profit will with all tenders there is no certainty that people development process. The come from the remaining Airport Railway either consortium will be successful. Operations Training Department gained developments as they are completed. Integrated Management System – Beyond that, we expect our Tseung Possible merger between ISO9001, ISO14001 and OHSAS18001 Kwan O property developments to be a MTR and KCRC accreditation. The Company also secured significant contributor. In our Airport During the year, we worked hard in close a “Most Innovative Award”from the Railway developments we expect to co-operation with KCRC on the merger HKMA’s Excellence in Training programme receive our share of the remaining discussions. As a result, we were able to and a “BEST”Award from the American 25,245 gross square metres of retail shell complete and present our joint merger Society for Training and Development. structure at Union Square mainly over the proposal to the Government in Most significantly, for the third next two years, and the fit out works will September. This joint proposal, which we consecutive time, we were recognised by take three years prior to an anticipated believe properly addresses the five the Hong Kong Labour Department with opening date of end 2007. parameters set out by the Government a Good People Management Award, when it invited the two corporations to making us the only company to have begin discussions, is currently under achieved this. review by the Government. At the same MTR CORPORATION LIMITED ANNUAL REPORT 2004 11

In January 2005 we received the Finally, I would like to extend my remaining up-front payment of gratitude to my fellow Directors, HK$936 million relating to Olympic management and all employees, as well Package Three. This will be booked to our as customers, suppliers and shareholders, profit and loss account in accordance for their contributions to MTR’s with the progress of construction and continuing success during the year. pre-sale activities, expected to be over the next two years. At Tseung Kwan O, profit from the successful Residence Oasis at Hang Hau Station was already recognised in 2004. In 2005, we will receive the 3,500 gross square metres shopping arcade,“The Lane”in Hang Hau Station. Booking of profit for the other C K Chow, Chief Executive Officer three Tseung Kwan O residential Hong Kong, 1 March 2005 developments currently being built, at Tiu Keng Leng, and Tseung Kwan O Town Centre Area 57a and Area 55b, will depend on the timing and progress of pre-sales as well as the timing of receipt of the Occupation Permit. Currently we expect only the development of 390 units at Tseung Kwan O Town Centre Area 57a to receive Occupation Permit in 2005. Package One of Area 86, which was awarded in January 2005 is not expected to contribute to our financial results before 2008. Given current property market conditions and planned development and pre-sale activities, the relatively fewer projects from which we anticipate to record profit in 2005 could lead to lower property development profit recognition than that recorded in 2004.

The Company’s financial statements and results may be affected by a number of accounting changes in 2005, notably those relating to valuation of investment properties and financial instruments, which came into effect on 1 January 2005. I will refer you to the more detailed discussion of these in the Financial Review section. 12 Operating network with future extensions MTR CORPORATION LIMITED ANNUAL REPORT 2004 13 Key figures

Financial highlights in HK$ million 2004 2003 % Increase/(Decrease)

Revenue –Fare 5,932 5,489 8.1 – Non-fare 2,419 2,105 14.9 Operating profit from railway and related operations before depreciation 4,546 3,747 21.3 Profit on property developments 4,568 5,369 (14.9) Operating profit before depreciation 9,114 9,116 (0.0) Profit attributable to shareholders 4,496 4,450 1.0 Total assets 106,674 102,366 4.2 Loans, obligations under finance leases and bank overdrafts 30,378 32,025 (5.1) Shareholders’funds 63,499 57,292 10.8

Financial ratios in %

Operating margin 54.4 49.3 5.1% pt. Gross debt-to-equity ratio 47.8 55.9 (8.1)% pt. Return on average shareholders’funds 7.4 8.0 (0.6)% pt. Interest cover in times 6.1 5.6 8.9

Share information

Basic earnings per share in HK$ 0.84 0.85 (1.2) Dividend per share in HK$ 0.42 0.42 – Share price as at 31 December in HK$ 12.45 10.25 21.5 Market capitalisation as at 31 December in HK$ million 67,105 54,209 23.8

Operations highlights

Total passenger boardings – MTR Lines in millions 833.6 770.4 8.2 – Airport Express Line in thousands 8,015 6,849 17.0

Average number of passengers in thousands – MTR Lines weekday 2,403 2,240 7.3 – Airport Express Line daily 21.8 18.7 16.6

Fare revenue per passenger in HK$ –MTR Lines 6.50 6.57 (1.1) – Airport Express Line 64.25 62.07 3.5

Proportion of franchised public transport boardings in % – All movements 24.8 24.3 0.5% pt. – Cross-harbour movement 59.6 58.7 0.9% pt.

Proportion of transport boardings travelling to/from the airport in % – Airport Express Line 21 23 (2)% pt. 14 Executive management’s report MTR CORPORATION LIMITED ANNUAL REPORT 2004 15

Record high patronage Improving market share Inter-modal links Station and service improvements 25th anniversary promotions Continued efficiency and productivity gains

railway operations moving ahead with Hong Kong 16 Executive management’s report > Railway operations

> Total fare revenues for MTR Lines and AEL increased 8.1% to HK$5,932 million, on strong rebound in patronage post SARS > Successful opening of new facilities at Tsim Sha Tsui Station for interchange with East Rail Extension > Achieved all Operating Agreement Performance Requirements and Customer Service Pledge targets

The recovery from the outbreak of SARS saw the Company’s core Hong Kong railway operations resume steady growth as MTR continued to upgrade the network environment to enhance passenger comfort and safety.

Patronage After the severe impact of SARS on our ridership in 2003, passenger numbers for 2004 experienced a strong rebound, rising by 8.3% as economic and social activities in Hong Kong returned to normal. Use of the network was further supported by a sharp increase in inbound tourists from the Mainland. In addition, the opening of West Rail in December 2003 and the interchange facilities at Nam Cheong and Mei Foo stations generated further increases in patronage and more than compensated for the slight loss of patronage resulting from the opening of KCRC’s East Tsim Sha Tsui Station in October.

For the year, the MTR Lines recorded total passenger volume of 834 million, against 770 million in 2003. This year, we also saw the highest record on a single, regular 19-hour service day with patronage volume of 2.72 million on 17 December, as well as a record Christmas Eve patronage of 3.38 million passengers. Our passenger volume represents a 24.8% share of the

Effective asset management and a robust maintenance regime are important to us MTR CORPORATION LIMITED ANNUAL REPORT 2004 17

total franchised public transport market, connects with people’s everyday life. This An online shopping service on the MTR higher than that of 2003. Within this total, was supplemented by a series of 20 website was added to the number of the Company also increased our share of one-minute TV segments using channels for distribution of MTR cross-harbour traffic to 59.6%. Fare interesting statistics to highlight MTR’s souvenirs and Airport Express tickets, revenues from operations rose 7.0% to outstanding services. MTR also participated while the extended MTR Club “WOW Fun HK$5,417 million from HK$5,064 million. in the “Hong Kong Superbrands” Scheme”successfully promoted network programme series produced by TVB Jade, patronage and shopping at MTR On AEL, passenger volume rose by 17.0% which showcased the Company’s managed shopping centres. to 8.0 million. The average fare rose from contribution to the community over the HK$62.07 in 2003 to HK$64.25. Fare Promotions were also stepped up for AEL. decades. More directly, Hong Kong revenues rose by 21.2% to HK$515 Increased service frequency, from four Station was decorated with a birthday million. Despite the growth in passenger trains to five trains an hour, was advertised theme, and a lucky draw was conducted volume, AEL’s estimated market share of through a large-scale marketing campaign. to draw additional public interest. Special 21% was slightly lower than in 2003, Three festive promotional campaigns 25th Anniversary ticket sets were reflecting a change in the mix of visitors boosted incremental revenue, notably the produced, as well as other 25th arriving at and departing from Hong group ticket plus free child ride during Anniversary supplements. Kong’s airport. the summer months. More generally, we continued to run fare For overseas markets, awareness was Service promotion campaigns which emphasised the value enhanced by participating in TV MTR’s 25th Anniversary provided a for money offered by MTR services. programmes in the Mainland and the strong platform on which to raise brand Popular schemes included “Ride 10 Get 1 launch of online advertising in key awareness and promote patronage to Free”,which was slightly revised in markets including the Mainland, Japan specific demographic groups. Beginning October 2004, and a relaunched “$2 and Korea. AEL launched a “Customer in April, the Company launched a series of Holiday Ride”promotion for children and Service Ambassadors”programme to anniversary celebration campaigns, elderly citizens on Sundays and major establish a continuous presence in the highlighted by a special anniversary theme public holidays, to promote family travel. airport arrival area, as well as online train running on the Tsuen Wan Line. Five new fare saver machines were added ticketing to secure pre-arrival sales of AEL at locations which would help increase A thematic campaign with a series of tickets, especially in Taiwan, US and UK. utilisation of MTR and five intermodal three TV commercials reinforced the MTR also for the first time partnered with discount promotions were launched to message that MTR is not only an integral Cathay Pacific Airways to pre-sell tickets attract feeder patronage. part of Hong Kong’s transport system but

Passengers and fares The economic rebound boosted fare revenue and passenger Fare trend numbers to record high. MTR’s ability to control costs again delivered a value for money service. 18 Executive management’s report > Railway operations

in-flight. Marketing partnerships Rail, a leading international rail expert The Lloyd’s Register Rail report was continued with the Asia Miles frequent and validation agency. Following the delivered in February 2005. The flyer programme and the Hong Kong conclusion of the investigation by the conclusions were that MTR service Tourism Board. internal task force in November, the performance has seen significant Company began implementation of a improvement since 2001 and that best Service performance series of improvement initiatives to practice asset management was in place The Company recognises that excellence augment our robust maintenance regime across the Company. We will implement in service delivery is crucial to our and incident handling procedures. the recommendations put forward in the success in being a pre-eminent public These include: report. These include enhancements to transport provider. During the year, the processes for the introduction of new • Increasing inspection of key railway We maintained our very high standards of lines and facilities to minimise any systems reliability, safety, comfort, and customer • Adopting technology from outside the impact to service delivery, as well as satisfaction. railway industry improvements to our asset management Using higher-standard components systems, including IT systems, to cater for Regrettably, a number of noticeable, but • newly available in the market higher customer sensitivity and improve not safety critical, incidents in the final • Accelerating the programme for certain the quality of the journey for our months of the year caused some delays equipment and parts replacement customers. and inconvenience to passengers, giving • Rapid deployment of staff at stations rise to public concerns over the reliability during train service disruptions Our Asset Management Policy stipulates of the Company’s systems. In an effort to • Improving communication with that MTR is committed to the efficient understand the root causes of these passengers in case of disruptions. and effective management of our railway incidents and address passenger assets to ensure that the Operating These measures aim at further concerns, MTR established an internal Agreement and all relevant statutory strengthening MTR’s ability to reduce the task force of senior management and requirements are complied with. This is chance of equipment failures that could technical experts to investigate these achieved through continuous affect train service and cause delays, and occurrences, and commissioned an improvement of the asset management minimising inconvenience to passengers independent review of our railway processes under the principles of in the event of a delay. processes and assets by Lloyd’s Register minimising the life cycle costs of assets, maximising their worth to the business and managing the associated risks.

Railway operating costs per car km operated Market shares of major transport operators in HK Continued improvements in efficiency and productivity led to MTR’s value for money services and improved connectivity with other further cost savings. modes of transport helped increase market share. Additional costs relating to SARS caused the maintenance cost ratio to rise slightly in 2003. Despite the attention given to these Levels of customer satisfaction recorded incidents of delay and concern to during the year by our regular survey passengers, for 2004 as a whole the remained generally high. In 2004, the New entrances, such as that at Mong Kok Station, are giving Company continued to exceed the Service Quality Index for the MTR Lines a bright, modern appearance minimum performance levels required by and AEL stood at 71 and 82 respectively to stations the Government under the Operating on a 100-point scale. MTR also again Agreement, and the more stringent performed well according to the 11- Customer Service Pledges established by member Community of Metros (CoMET) MTR itself in every area. For the year, MTR benchmarking report, in the areas of passenger journeys on time were 99.9%, safety, service quality and passenger cost. supported by 99.9% reliability for train In addition, MTR won the Top Service service delivery. Escalator reliability was Award 2004 – Public Transport from 99.9%, with the average machine out of Hong Kong’s Next Magazine,the sixth service for about half-an-hour per month. year in a row the Company has achieved Excellent performance was also recorded this recognition. in key areas which affect passenger The effectiveness of MTR’s crisis response comfort such as temperature, ventilation was demonstrated in January, when the and cleanliness. first ever arson attack took place on an 20 Executive management’s report > Railway operations

Urban Line train. The incident was Service improvements Projects to improve barrier free resolved quickly and caused no injury to The year saw further improvements to movement in stations continued in 2004 either passengers or personnel thanks to MTR’s infrastructure and services. with new passenger lifts installed at the rapid and effective response of MTR Central,Tin Hau and Sai Wan Ho stations. In April, a new entrance at Kowloon Tong staff and the calm reaction of passengers. At Tsim Sha Tsui Station, three new Station connecting the station with the In recognition of their exemplary escalators were installed and opened in new concourse of KCRC’s Kowloon Tong performance in handling of the incident, March for public use at a refurbished Station was opened. In September, MTR the MTR employees involved were entrance leading to Humphreys Avenue. also opened a new subway system presented with commendation letters by passing underneath Mody Road The project to retrofit platform screen the Secretary for Environment,Transport connecting Tsim Sha Tsui Station with the doors at all 30 underground stations, and Works, on behalf of the Government. KCRC’s East Tsim Sha Tsui Station. These which began in early 2002 and is Despite the incident, MTR was able to developments enhanced the ease of scheduled for completion in March 2006, maintain a high level of safety access to the KCRC and MTR networks remained on schedule. At the end of performance throughout 2004 and all and of passenger transfer between them. 2004, these doors were in operation on safety targets set out in the Corporation 56 of the 74 platforms involved in 22 MTR’s interchange with the East Rail is Safety Plan were achieved. The incident stations. This means that the project was part of a wider strategy to promote nonetheless highlighted the importance completed on the Tsuen Wan Line and for patronage through improved linkage of safety to MTR train operations and all stations on the Kwun Tong Line with other modes of transport. 2004 saw service and throughout the year, the between Yau Ma Tei and Wong Tai Sin. the extension of inter-modal fare Company continued our efforts to The project was also completed discounts to 14 feeder routes for travellers promote safe behaviour when travelling between Sheung Wan and Causeway Bay transferring to MTR from feeder buses on on MTR. Educational activities and stations, and at North Point Station, on three New Lantao Bus routes, ten Green campaigns were launched, including a the Island Line. Minibus routes and one cross-border bus Safety Web Game that highlighted MTR’s route. To enlarge the catchment area, the All of the new facilities, entrances and safety messages in an easy to understand number of fare saver machines offering improved maintenance and service and attractive way, a Safety Carnival and a discounts to Octopus card holders at delivery regimes were introduced with no one-month safety campaign. locations some distance from MTR increase in manpower levels. stations was increased to 15 in 2004.

Market shares of major transport operators Market shares of major transport operators crossing the harbour to/from the airport Speed and covenience were among the key attributes leading to AEL’s estimated market share dropped slightly, partly due to a change in improved cross-harbour market share. the mix of visitors arriving at and departing from the airport. MTR CORPORATION LIMITED ANNUAL REPORT 2004 21

Productivity increases The continuing hiring freeze and increased outsourcing helped MTR to raise productivity during the year, as did several other initiatives which aimed at creating efficiencies. Airport Railway stations assumed responsibility for AEL car park management at Hong Kong, Kowloon and Tsing Yi stations after the expiry of management contracts, and this has led to marked productivity gains. More effective utilisation of non-traffic hours was achieved through the introduction of a new computer system to facilitate booking, confirmation and cancellation of possessions and pedestrian access works on tracks.

As a result of these productivity gains, operating costs per car km decreased 1.8% in 2004 to HK$22.1. Since 1998, operating costs per car km has decreased by 24.3%.

Octopus Card Enquiry Machines in stations allow passengers to check their balances, adding to convenience

Staff efficiency and financial performance Benchmarking comparisons A hiring freeze and other productivity initiatives resulted in further MTR again performed well against international benchmarks, gains in efficiency. particularly on service reliability and punctuality. * the leading metro improved its costs significantly 22 Executive management’s report > Railway operations

System and market information

Railway operation data 2004 2003

Total route length in km 87.7 87.7

Number of rail cars 1,050 1,050

Number of “e-lnstant Bonus”machines in stations 18 18

Number of station kiosks and mini-banks in stations 515 490

Number of poster advertising media in stations 14,863 14,328

Number of advertising media in trains 13,072 13,072

Daily hours of operation 19 19

Minimum train headway in seconds Morning peak Evening peak Morning peak Evening peak – Tsuen Wan Line 128 144 128 144 – Kwun Tong Line 128 144 128 144 – Island Line 128 156 128 156 – Tseung Kwan O Line 160 180 160 180 – Tung Chung Line Hong Kong – Tung Chung 480 600 480 600 Hong Kong – Tsing Yi 240 300 240 300 – Airport Express Line 720 720 900 900

International performance comparisons: The 11-member Community of Metros (CoMET)

MTR* Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro Metro system network data (2003) Lines ABCDEFGH I J

Passenger journeys in million 770 458 948 1,375 602 3,201 1,384 1,248 400 507 2,074

Car kilometres in million 113 129 482 331 149 641 539 218 94 88 255

Route length in km 80 153 408 201 227 276 471 212 115 58 183

Number of stations 49 170 275 147 190 155 424 297 66 52 138

* The Airport Express Line is excluded from metro benchmarking

Note: The other metros in the comparison are Berliner Verkehrsbetriebe, London Underground Limited, New York City Transport, Sistema de Transporte Colectivo, Regie Autonome de Transports Parisiens Metro, Regie Autonome de Transports Parisiens Regional Express Railway, Metroplitano de Sao Paulo,Tokyo Metro, Moscow Metro and Metro de Madrid. The benchmarking agreement prohibits specifically identifying the data by metro system. MTR CORPORATION LIMITED ANNUAL REPORT 2004 23

Operations performance in 2004

Performance Customer Service Actual performance Service performance item Requirement Pledge target in 2004

Train service delivery 98.5% 99.5% 99.9%

Passenger journeys on time –MTR Lines 98.5% 99.5% 99.9% – Airport Express Line 98.0% 99.0% 99.9%

Train punctuality –MTR Lines 98.0% 99.0% 99.7% – Airport Express Line 98.0% 99.0% 99.9%

Train reliability: train car-km per train failure causing delays ≥ 5 minutes N/A 500,000 1,027,233 Ticket reliability: magnetic ticket transactions per ticket failure N/A 8,000 10,125

Add value machine reliability 95.5% 98.0% 99.4%

Ticket issuing machine reliability 93.0% 98.0% 99.5%

Ticket gate reliability 97.0% 99.0% 99.8%

Escalator reliability 98.0% 99.0% 99.9%

Passenger lift reliability 98.5% 99.0% 99.8%

Temperature and ventilation – Trains: to maintain a cool, pleasant and comfortable train environment generally at a temperature at or below 26°C N/A 97.0% 99.9% – Stations: to maintain a cool, pleasant and comfortable environment generally at or below 27°C for platforms and 29°C for stations concourses, except on very hot days N/A 90.0% 99.3%

Cleanliness – Train compartment: cleaned daily N/A 98.5% 100% – Train body: washed every 2 days N/A 98.0% 99.9%

Passenger enquiry response time within 7 working days N/A 99.0% 99.9% Spectacular trackside plasmas are the latest popular advertising format from MTR station commercial & other businesses leveraging our infrastructure

> Revenues from station commercial and other In January 2004,TraxComm began businesses increased 17.4% to HK$1,311 million operation and management of a 50 Gigabit bandwidth network. This serves a > Station renovations enhance retail environment number of telecom service operators in Hong Kong and has extended the reach > Strong contribution from Octopus of the fibre-optic network to 26 locations including key commercial buildings, data centers, China gateways, the Hong Kong Advertising To provide accountable viewership Internet Exchange and landing stations. Our advertising business benefited from statistics to advertisers, we commissioned Hong Kong’s economic rebound as well Nielsen Media Research to conduct the Station commercial as our continuing strategy to upgrade first “Reach & Frequency Research of MTR Revenue from station commercial advertising venues and introduce new Advertising”,the first research of this type facilities increased by 8.4% to HK$298 formats to enhance their attractiveness. in the out-of-home advertising market in million, as the number of retail shops in As a result, advertising revenue rose Hong Kong. The survey was completed in our network increased and the retail 21.0% to HK$467 million. June 2004 and the results have helped in market experienced a strong recovery. strengthening our media pricing strategy Spectacular tunnel advertising was and in increasing advertisers’media The programme to renovate stations introduced in April between Wan Chai planning with MTR. continued to deliver additional commercial and Causeway Bay stations, allowing riders floor area and enhance the retail to view large, colourful displays during Telecommunications environment. Renovation was completed the journey. In June, a large billboard was Revenue from telecommunications at Choi Hung, Central, Shau Kei Wan,Tai Koo, installed on the external wall at Quarry including those of fixed-line subsidiary Tsuen Wan, Po Lam, Mei Foo, Admiralty and Bay Station whilst a Bloomberg display TraxComm, rose by 20.2% to HK$238 Hong Kong stations, adding a total of 1,192 showing real-time financial information million, mainly as a result of increased square metres to retail floor area. However, was introduced at Hong Kong Station, volumes of mobile phone calls. with retail space being reduced at Kowloon part of the IFC complex. In December, a Station to facilitate station integration plasma ring was launched at Causeway The existing integrated radio system was works with the future shopping centre at Bay Station, adding a new format to the successfully upgraded to support 3G Union Square, on a net basis total station concourse and trackside plasma network, service of UMTS standard along the Island retail floor area increased by 268 square and bringing the number of plasma screens Line, making it one of the first rail networks metres or 1.4% to 18,717 square metres. in the MTR system to a total of 124. The in the world to be 3G enabled. By the end During the year, renovation works began programme to install concourse12-sheet of 2005, it is anticipated that passengers at nine other stations, which will be advertising panels continued and 696 will be able to enjoy seamless 3G service completed in 2005. such panels were installed in 2004. anywhere within the MTR network. MTR CORPORATION LIMITED ANNUAL REPORT 2004 25

The Company continued to improve the services to its operations. The completion Rail Sourcing Solutions retail mix, introducing a total of 69 new of this ambitious project, combined with (International) Limited shops and 28 new trades including H2O, our already established track record and In August, we established Rail Sourcing Yume, Lo Hang Ka, Q Q Rice, Pie & Tart and expertise in smartcard technology, Solutions (International) Limited as a TCBY. Sales counters were also introduced will enhance the competitive position of wholly-owned subsidiary, to expand into in Tseung Kwan O Station for short-term MTR and Octopus in pursuing similar global railway supply and sourcing leases to retailers, increasing the flexibility business opportunities in other markets. services. The new subsidiary undertakes worldwide sourcing and marketing of offered at this station. Our strategy is to pursue similar large scale components required for rail vehicles, smartcard projects worldwide providing infrastructure and maintenance, bridging External consultancy hardware, software and consultancy the gap between manufacturers and The Company is currently engaged in support. In November, we submitted a buyers around the world. consultancy contracts in 22 cities in tender for the Melbourne Smartcard 11 countries. project with partners Thales e-Transactions Octopus Cards Limited (Octopus) CGA S.A. and ADI, and are currently working Revenues from external consultancy Octopus Cards Limited, the Company’s with other partners on upcoming projects increased by 27.3% to HK$182 million. smartcard subsidiary, achieved further in Melbourne,Toronto and Los Angeles. During the year, MTR made a strategic progress in both the transportation and decision to reorient this business by In the Mainland,MTR’s external consultancy retail sectors. As a result of increased focusing on the areas of smartcard business continued to progress. Shanghai service providers, higher average daily projects and those projects likely to lead Hong Kong Metro Construction usage and the economic recovery, pre-tax to investment opportunities and/or retain Management Co. Ltd. , the Company’s profit contribution to the Company our core competencies. Typically these joint venture subsidiary in Shanghai, acting from Octopus increased by 91.3% to projects are larger and of longer duration, as the Owner’s Representative for Phase 1 HK$44 million. and therefore provide more opportunities of Line 9 of the Shanghai Rail Transit, Average daily usage rose from HK$50.7 for growth and profitability, but they also helped ensure that this RMB 11 billion million to HK$57.5 million. Cards in involve a longer lead time. (HK$10.4 billion) project made substantial circulation grew from 10.4 million at the progress towards completion by the end In the area of smartcards, together with end of 2003 to 11.8 million at the end of of 2007. Site activities continued to Octopus and our other partners, we 2004, while the number of service progress satisfactorily and construction again made good progress on the providers increased from 253 to 299. implementation of a national system for is presently 80% complete in Song Jiang the Netherlands. Despite a challenging District and 17% in Min Hang District. Continued penetration in the transport schedule, both hardware and software Construction activities also began before sector has seen almost all of Hong Kong’s were delivered on time. The project is on year end at Hong Mei Road Station in more than 2,600 Green Minibuses accept track for completion of the Design, Build Xu Hui District. Line 9 is one of the new Octopus card as a mode of payment, and Test phase in April 2005, following infrastructure projects to be built for the along with 50 Red Minibuses, 167 car which the Company will provide support 2010 Shanghai EXPO. parks and all metered parking spaces. Growth in retail usage continued and this was driven by the addition of new service providers such as Wing Wah Cake Shop, and full roll out to existing providers such as McDonald’s and Mannings. To provide added convenience and flexibility, Octopus enables customers to link any type of Octopus card with the Automatic Add Value Service through a bank or credit card account at any participating financial institution. The number of such institutions increased to 19 in 2004 and now includes HSBC, Bank of China, Standard Chartered Bank and Citibank.

Overall usage was supported by year-round promotions, including “Rewards on the Go”, a monthly lucky draw for frequent Octopus card users at Revenues from other business activities Non-fare revenues rose across the board in Hong Kong as the economy recovered. retail outlets and car parks. 26 Executive management’s report > International expansion

Consultancy contracts in 22 cities

Beijing Metro Line 4 public-private-partnership

Shenzhen Metro System Line 4 BOT project MTR CORPORATION LIMITED ANNUAL REPORT 2004 27 New London office

Pursuing operating franchises in Europe

Joint-venture bids in UK

international expansion bringing our expertise to overseas markets 28 Executive management’s report > International expansion

> Major step forward for Beijing Line 4 with the initialling of Concession Agreement > Planning and seeking Government approval in progress for Shenzhen Line 4 > European strategy focuses on train operation franchises

Mainland China for the construction of Phase 2 of Line 4 In the Mainland, our investment strategy of the proposed Shenzhen Metro System focuses on the major cities of Beijing, and the operation of the entire line for a Shanghai and Shenzhen. In these cities, term of 30 years. the demand for mass rapid transit Line 4 is a 21-kilometre double-track systems and hence potential for profit, is urban railway running from Huanggang, greatest due to expanding populations, at the boundary between Hong Kong heightened environmental concerns and and Shenzhen, to Longhua New Town in deteriorating traffic conditions. In Shenzhen, with a total of 14 stations. It executing this strategy, the Company has will form the major north-south railway adopted a gradual approach and is corridor linking Hong Kong SAR, through leveraging the experience and expertise Shenzhen Special Economic Zone with When completed, Beijing Metro gained from one project to others. Line 4 will be the main north- potential connections to other parts of south rail artery of Beijing MTR’s drive to invest in suitable projects the Mainland. Phase 1 of Line 4, an in the Mainland saw two landmark approximately 4.5 kilometre section developments during the year. between Huanggang and Shouniangong, is targeted for full completion before the In January, the Company entered into an end of 2008. Some sections of Phase 1 Agreement in Principle for a Build- are already complete and being operated Operate-Transfer (BOT) project with the by Shenzhen Metro Company Ltd. Upon Longbeicun Station Shenzhen Municipal People’s Government completion of Phase 2 by MTR’s project company in late 2008, both Phases 1 and 2 will be operated by MTR. Total investment Beigongmen Station in Phase 2 by the project company is estimated at RMB 6 billion (HK$5.7 billion), which will be financed by equity Yiheyuan Station

Yuanmingyuan Station

Chengfulu Station MTR CORPORATION LIMITED ANNUAL REPORT 2004 29

capital of RMB 2.4 billion (HK$2.3 billion), with BIIC and BCG to form a PPP company opportunities in Beijing, Shenzhen and with the balance by non-recourse bank for the investment, construction and Shanghai, in line with those cities planning loans in Renminbi. The project will be operation of the Beijing Metro Line 4. This future extensions to their metro networks. implemented based on our proven “rail line will form one of the core transport In addition to the three cities which are and property model”in Hong Kong, with infrastructure projects for China’s capital. our principal focus, MTR has explored associated property developments opportunities in cities such as Chengdu, The Agreement in Principle sets out the comprising 2.9 million square metres of Wuhan,Tianjin and Nanjing. framework of the partnership for the commercial and residential space along investment, construction and operation the railway. Europe of the line subject to a Concession Our growth strategy in Europe differs Since signing the Agreement in Principle, Agreement with the Beijing Municipal from that in the Mainland in that it MTR has set up a project office in Shenzhen People’s Government,for a term of 30 years. concentrates on train operation to undertake preliminary design of the In February 2005, together with our franchises, which do not require railway and property works. We have also partners, we initialled the Concession significant capital expenditure. MTR will entered into negotiations with the Agreement with the Beijing Municipal seek to enter into joint-venture Shenzhen Municipal People’s Government People’s Government and now await partnerships with experienced local firms on a Concession Agreement and other approval from the National Development to bid for operation and maintenance related agreements which would give and Reform Commission. The total franchises and contracts as the MTR’s project company the right to investment for the project is approximately deregulation of railway industries in construct Phase 2 and to operate the RMB 15.3 billion (HK$14.4 billion), 70% of Europe continues to unfold. The entire line, together with the right to use which, comprising mainly land acquisition Company will initially focus on the highly the Phase 1 facilities. These agreements and civil construction works, will be deregulated UK market, and build on this are subject to the approval of the funded by the Beijing Municipal People’s experience to explore other Central Government. Government. The partnership project opportunities in Continental Europe. Planning for property developments company will invest approximately RMB 5 In November, the Company signed a associated with the Shenzhen Line 4 billion (HK$4.7 billion) to finance the joint-venture agreement with the UK’s project achieved good progress, despite a provision of trains and related electrical Great North Eastern Railway Holdings delay in the approval process as a result and mechanical systems, and will be Limited to bid for a service contract to of the macroeconomic control measures responsible for the operation and operate and maintain the trains for the imposed by the Central Government. In management of the new line for a period Integrated Kent Franchise (IKF), with MTR October, a proposal for a sustainable of 30 years. owning 29% in the joint-venture planning concept for the Longhua MTR and BCG will each own 49% of the company. IKF is a suburban commuter Extension Area was submitted to and joint venture company, with BIIC owning network in Kent, southeast England received endorsement from the the remaining 2%. The joint venture operating through 179 stations, 1,600 rail Shenzhen Municipal People’s company will seek non-recourse bank cars and with annual revenue of about Government. A preliminary master plan loans to finance over 60% of the project £300 million. It will also include the high for the four development sites in this area with the remainder to be funded by speed railway service from the Kent Coast is currently under discussion with the equity capital. to London which will operate over the Shenzhen authorities, and we plan Channel Tunnel Rail Link. Since formally to submit this plan in early 2005, This new 29-kilometre underground December, MTR has been working to with target development completion metro line will run from Majialou Station pursue a similar opportunity for the from 2008 onwards. on the South Fourth Ring Road to the Thameslink / Great Northern Franchise, north west Haidian District and terminate In April, MTR signed a Memorandum of which serves London north and south of at Longbeicun Station, forming a main Understanding with Beijing Infrastructure the River Thames. north-south traffic artery of Beijing. The Investment Co. Ltd. (BIIC) and Beijing 24 stations along the line include major To support these initiatives, we opened Capital Group (BCG), both subsidiaries stops at Beijingnan, Xuanwumen, Xidan, an office in London in July 2004 as our of the Beijing Municipal People’s Xizhimen, Xueyuannanlu, Zhongguancun, first step towards building a permanent Government, with the intention of Yuanmingyuan and Yiheyuan. presence in Europe, where we aim to forming a public-private-partnership for partner with local companies to pursue the Beijing Metro Line 4 project. After in- The Company is carrying out railway similar new business opportunities. depth discussions, in December we assessments of other investment entered into an Agreement in Principle 30 Executive management’s report > Property business

building quality of

propertylife in Hongbusiness Kong and beyond

Successful sales at The Harbourside, Coastal Skyline, Caribbean Coast, Residence Oasis and No. 8 Clear Water Bay Road

MTR’s Two IFC floors 100% leased Hong Kong and China Expanded property management portfolio in

Package One of “Dream City”at Area 86 awarded

Strong business performance at all shopping centres 32 Executive management’s report > Property business

> Property development profit of HK$4,568 million > Property investment and management revenue increased 12.1% to HK$1,108 million > Strong sales momentum across MTR property developments

MTR’s various property businesses benefited in 2004 from a sustained recovery in the Hong Kong property market, growth of inbound tourism, especially from the Mainland, and the overall improvement in economic sentiment.

Property development For the year, income from property development was HK$4,568 million, a Good sales results were decrease of HK$801 million from 2003, achieved in property when we recognised as income the receipt developments along Airport of our share of floors in Two IFC. In 2004, Railway and Tseung Kwan O Line our property developers took advantage of the improved market sentiment to maximise profit by releasing sales in stages, thereby achieving a balance between sales price and sales volume.

Airport Railway Along the Airport Railway, profit contributions came from the receipt of part of the Union Square retail shell structure at Kowloon Station, amounting to about 57,506 square metres, which was handed over by the developer in December. Other profit contributors included our share of surplus proceeds from The Harbourside, and recognition of deferred income from Tung Chung Packages Two and Three (Coastal Skyline and Caribbean Coast), and The Harbourside.

Sales and pre-sales of properties benefited from the strong sentiment in the property market. Sales of luxury apartments at The Harbourside, MTR CORPORATION LIMITED ANNUAL REPORT 2004 33

Union Square began during the year and for Union Square Packages Five, Six and Pre-sale consent for Area 55b is planned achieved very satisfactory results. The Seven was undertaken by the developer, for and is likely to be granted in the first pre-sale of Caribbean Coast Towers 9 and in light of opportunities arising from quarter of 2005. 11 met with a very good response. The infrastructure development in the vicinity, At Area 86, approval was granted in sale of the 392 units at residential Tower 2 notably the West Kowloon Cultural August for a substantial revision to the of Tung Chung Package Two, the Coastal District and KCRC’s future Kowloon Master Layout Plan for the “Dream City”, Skyline development, was launched in Southern Link. As a result, completion of which greatly enhanced the garden city September. The Occupation Permit was the Landmark Tower development may and pollution free concept. In December, issued for Caribbean Coast Towers 6,7 and 8. be delayed to 2010. developers were invited to tender for Package One of Area 86, location of the The Company and our property Tseung Kwan O Line Tseung Kwan O Line depot and future developers continued to work with the Along the Tseung Kwan O Line, Tseung Kwan O South Station. Unlike our Government and the Town Planning development profit was derived from previous property tenders, MTR agreed to Board to refine our future development Residence Oasis at Hang Hau Station, pay half of the assessed Government land plans, in order to take advantage of where the Occupation Permit for premium in the tender of Package One. market developments. The Master Layout Residence Oasis and The Lane was As a result, a number of mid-size as well Plan for Tung Chung Package Two, granted in December. Sales of residential as large developers participated in the the Coastal Skyline development, was units of Residence Oasis were very tender, offering attractive terms to the revised to provide more open space by satisfactory, with more than 90% of the Company. The tender was awarded to a changing the original eight 13-storey total units pre-sold by year end. This subsidiary of Cheung Kong (Holdings) blocks to six 15-storey blocks in the project received the Hong Kong Institute Limited in January 2005. low- rise development and this was of Surveyors’ “Top Ten Best Layout Award” approved by the Town Planning Board in in November. Pre-leasing also progressed The Company submitted a planning August. At Tsing Yi, the Town Planning well for the associated 3,500-square application for Area 56 to the Town Board decided to take forward our metre shopping centre,The Lane, with Planning Board in January 2005, proposed part-conversion scheme to the majority of the space committed by to convert usage of the commercial change the lorry park to retail use year end. site to a more commercially viable through a land use rezoning under the mixed-use development. Town Planning Ordinance. Pre-sale consent for Area 57a was obtained in August and the developer is At Kowloon Station, a review of the anticipated to launch sales in early 2005. construction programme and design

111

Airport Railway property development plan Airport Railway property development progress Revisions were made to some development plans in light of Developments at Kowloon and Tung Chung stations are the focus changing market conditions. of construction activity on the Airport Railway. 34 Executive management’s report > Property business

Investment properties IFC”was 100% leased. To further enhance draws, prize redemptions and artistic The continuing economic recovery, service, a new technical services model performances. Collectively, these supported by increases in inbound was developed for the building, providing promotional activities helped raise the tourism from the Mainland, increased comprehensive round-the-clock technical image, patronage and retail sales of the revenue from investment properties by services to tenants. shopping centres as did the regular 11.9% to HK$994 million compared with weekend shopping tours organised for The Company worked on improving the 2003. The primary drivers were higher Mainland visitors. In addition, MTR’s “Total retail environment to enhance the value renewal rents, favourable turnover rental, Quality Service Regime”,which is well- of our shopping centres. In March, a 1,100 better promotional counter income and supported by tenants, was rolled out in all square metre area at Level 3 of Maritime higher rental income from Two IFC. centres. The scheme regularly engages Square was converted into a new theme mystery shoppers to keep track of front MTR again achieved 100% occupancy at zone that increased rental income and line service quality and deliver feedback our shopping centres,Telford Plaza, boosted the shopping centre’s image. to tenants. Maritime Square, Luk Yeung Galleria and In August,Treasure Cove, located on the ground floor of Paradise Mall, was Paradise Mall. Several large new tenants Property management renovated into a new entertainment signed with the Company during 2004, and others most notably IKEA, which opened its zone to include a game centre, a CD store The year saw a steady growth in the largest store in Kowloon with a total floor and a bookstore. MTR’s property management portfolio, area of some 7,800 square metres in All MTR’s shopping centres benefited leading to a 14.9% rise in revenues from Telford Plaza. As at year end, MTR’s from the completion of an internal Fire property management to HK$108 million investment property portfolio totalled Services Safety Assessment and as compared to 2003. During the year, a 176,020 square metres. upgrading of the existing Integrated total of 2,368 units were added to the Demand for space at Two IFC continued Radio Network Systems for 3G mobile portfolio, comprising 854 units from to grow, as the building’s superlative phone operations. Sorrento, 1,122 units from The technical specification, quality and Harbourside, and 392 units from Coastal Throughout the shopping centres, the management standard attracted more Skyline. As a result, MTR by year end had Company continued to support tenants local and international companies. By a total of 49,283 residential units and by organising marketing and year end, the total floor area of MTR’s 18 558,796 square metres of commercial promotional campaigns such as lucky floors known as “Central 18 Zone at Two and office space under management.

Tseung Kwan O Line property development plan and progress Investment properties Developers responded enthusiastically to the tender for the Package One Full occupancy and rising rentals characterised MTR’s of “Dream City” at Area 86. investment properties. A taskforce was set up during 2004 to work towards the ISO 9001:2000, ISO 14000:2004 and OHSAS 18001:1999 certifications by mid 2005. Formal experience sharing sessions were introduced during the year to enhance located in intra-departmental communications and Shanghai’s Central to improve efficiency. Business District, Revenue from property agency was which will be completed stable at HK$6 million. in 2008. Other developers in the Mainland are also The MTR’s Octopus Access Control considering the business continued to expand, with application of Octopus annual turnover increasing by 19% to Access Control in their developments. HK$10 million.

In the Mainland, Octopus Access Control Business in the Mainland was adopted by Shanghai Hong Kong In the Mainland, MTR’s expertise Metropolis, a high-end serviced continued to translate into contracts for apartment and commercial complex pre-management advisory and property

Shoppers and tenants enjoyed a range of promotional and marketing activities in our shopping centres, including Telford Plaza

Distribution of property management income Units from Sorrento, The Harbourside and Coastal Skyline were added to the property management portfolio. 36 Executive management’s report > Property business

management. Presently, MTR has under metres and 22,000 square metres of with the Mei Li Shan Shui development, our pre-management contracts more commercial space. both luxury type residential properties. In than 800,000 square metres of residential Beijing, MTR acquired a management New pre-management contracts were and commercial space, and under our contract for the Jianwai SOHO signed in Shanghai with the Shanghai property management contracts 2,100 development, a new landmark in the Hong Kong Metropolis and in Chongqing residential units with 400,000 square Beijing Central Business District.

Airport Railway property developments (packages awarded)

Gross floor area No. of Actual or expected Location Developers Type (sq. m.) parking spaces completion date

Hong Kong Station (International Finance Sun Hung Kai Properties Ltd. Office 254,186 By phases Centre) Henderson Land Development Co. Ltd. Retail 59,458 from The Hong Kong & China Gas Co. Ltd. Hotel 102,250 1998–2005 Bank of China Group Investment Ltd. Car park 1,344 Sub-total 415,894

Kowloon Station (Union Square) Package One Wing Tai Holdings Ltd. Residential 147,547 Completed in (The Waterfront) Temasek Holdings (Pte) Ltd. Car park 1,332 2000 Singapore Land Ltd. Keppel Land Ltd. Lai Sun Development Co. Ltd. Worldwide Investment Co. (Bermuda) Ltd.

Package Two The Wharf (Holdings) Ltd. Residential 210,319 Completed by (Sorrento) Wheelock and Company Ltd. Car park 1,270 phases from Wheelock Properties Ltd. 2002–2003 Realty Development Corporation Ltd. Harbour Centre Development Ltd.

Package Three Sun Hung Kai Properties Ltd. Residential 100,000 2005 (The Arch) Cross border bus terminus 5,886 Car park 412

Package Four Hang Lung Properties Ltd. Residential 128,845 Completed in (The Harbourside) Car park 864 2003

Packages Five, Six Sun Hung Kai Properties Ltd. Retail 82,750 By phases and Seven Office * 231,778 from Serviced apartment * 72,472 2007–2010 Hotel * 95,000 Residential 21,300 Kindergarten 1,050 Car park 1,743 * Sub-total 1,096,947

* This falls within the range of 181,778 to 235,778 sq.m. for offices, 68,472 to 72,472 sq.m. for serviced apartments and 95,000 to 145,000 sq.m. for hotels as stipulated in the latest approved Master Layout Plan. The number of car parking spaces is subject to review. MTR CORPORATION LIMITED ANNUAL REPORT 2004 37

Airport Railway property developments (packages awarded) continued

Gross floor area No. of Actual or expected Location Developers Type (sq. m.) parking spaces completion date

Olympic Station Package One Sino Land Co. Ltd. Office 111,000 Completed in (Island Harbourview, Bank of China Group Investment Ltd. Retail 14,900 2000 HSBC Centre, Bank of Kerry Properties Ltd. Residential 169,950 China Centre and China Overseas Land and Investment Ltd. Indoor sports hall 13,219 Olympian City One) Capitaland Residential Ltd. Car park 1,380

Package Two Sino Land Co. Ltd. Retail 47,500 Completed in (Park Avenue, Central Kerry Properties Ltd. Residential 220,050 2001 Park and Olympian Bank of China Group Investment Ltd. Market 1,100 City Two) China Overseas Land and Investment Ltd. Car park 932

Package Three Sun Hung Kai Properties Ltd. Residential 103,152 By phases Kindergarten 1,300 from Car park 294 2005–2006 Sub-total 682,171

Tsing Yi Station (Tierra Verde and Cheung Kong (Holdings) Ltd. Retail 46,170 Completed in Maritime Square) Hutchison Whampoa Ltd. Residential 245,700 1999 CITIC Pacific Ltd. Kindergarten 925 Car park 920 Sub-total 292,795

Tung Chung Station Package One Hang Lung Development Co. Ltd. Office 14,999 By phases (Tung Chung Crescent, Henderson Land Development Co. Ltd. Retail 48,331 from Citygate and Seaview New World Development Co. Ltd. Hotel 22,000 1999–2005 Crescent) Sun Hung Kai Properties Ltd. Residential 275,501 Swire Properties Ltd. Kindergarten 855 Car park 2,041

Package Two HKR International Ltd. Retail 2,499 By phases (Coastal Skyline) Hong Leong Holdings Ltd. Residential 253,100 from Recosia Pte Ltd. Kindergarten 350 2002–2007 Car park 632 †

Package Three Cheung Kong (Holdings) Ltd. Retail 4,996 By phases (Caribbean Coast) Hutchison Whampoa Ltd. Residential 407,300 from Wet market 508 2002–2007 Kindergarten 350 Car park 1,211 Sub-total 1,030,789 Grand Total: 3,518,596 14,360

† This falls within the range of 632–745 as stipulated in the latest Master Layout Plan. 38 Executive management’s report > Property business

Tseung Kwan O Line property developments (packages awarded)

Gross floor No. of Actual or expected area parking completion Location Developers Type (sq. m.) spaces Status date

Tseung Kwan O Station Area 57a Sun Hung Kai Properties Ltd. Residential 26,005 Awarded in 2005 (Central Heights) Nan Fung Development Ltd. Retail 3,637 July 2000 Henderson Land Development Co. Ltd. Car park 74 Chime Corporation Ltd.

Area 55b New World Development Co. Ltd. Residential 84,920 Awarded in 2006 (The Grandiose) Chow Tai Fook Enterprises Ltd. Retail 11,877 January 2002 Wee Investments Pte. Ltd. Car park 249

Hang Hau Station Sino Land Co. Ltd. Residential 138,652 Awarded in Completed (Residence Oasis Kerry Properties Ltd. Retail 3,500 June 2002 in 2004 and The Lane) Car park 369

Tiu Keng Leng Station Cheung Kong (Holdings) Ltd. Residential 236,965 Awarded in By phases Retail 16,800 October 2002 from Car park 587 2006-2007

Tseung Kwan O South Station Area 86 Package One Cheung Kong (Holdings) Ltd. Residential 136,240 Awarded in 2009 Retail 500 January 2005 Car park 325 Residential Care Home for the Elderly 3,100

Tseung Kwan O Line property developments (packages to be awarded)*

No. of No. of Expected Expected packages Gross floor parking Period of completion Location envisaged Type area (sq. m.) spaces package tenders date

Tseung Kwan O Station 2 Retail 60,000 2005–2006 2009 Office 103,130 Car park 1,291

Tseung Kwan O South Station 7-13 Residential 1,463,460 2005–2010 2014 Area 86 Retail 49,500 Car park 4,438

* Subject to review in accordance with planning approval, land grant conditions and completion of statutory processes.

Choi Hung Park and Ride development

No. of Expected Gross floor parking completion Location Developers Type area (sq. m.)spaces Status date

Choi Hung Station Chun Wo Holdings Ltd. Residential 19,138 Awarded in July 2001 2005 (No. 8 Clear Water Bay Road) Retail 2,400 Car park 54 Park and Ride 450 MTR CORPORATION LIMITED ANNUAL REPORT 2004 39

Investment property portfolio (as at 31 December 2004)

Lettable floor No. of Company’s Location Type area (sq. m.) parking spaces ownership interest

Telford Plaza I, Kowloon Bay, Kowloon Shopping centre 39,982 – 100% Car park – 993 100%

Telford Plaza II, Kowloon Bay, Kowloon Shopping centre 19,411 – 50% Car park – 136 50%

Luk Yeung Galleria,Tsuen Wan, New Territories Shopping centre 12,066 – 100% Car park – 651 100%

Paradise Mall, Heng Fa Chuen, Hong Kong Shopping centre 19,448 – 100% Car park – 415 100% Maritime Square,Tsing Yi Shopping centre 29,261 – 100% Kindergarten 920 – 100% Car park – 220 100% Motorcycle park – 50 100%

G/F,No. 308 Nathan Road, Kowloon Shop unit 70 – 100%

G/F,No. 783 Nathan Road, Kowloon Shop unit 36 – 100%

New Kwai Fong Gardens, Kwai Chung, New Territories Kindergarten 540 – 100% Car park – 126 100%

International Finance Centre (IFC), Central, Hong Kong – Two IFC Office 39,529 – 100% – One and Two IFC Car park – 1,308 51%

Phase I, Carpark Building, Kornhill, Quarry Bay, Hong Kong Car park – 292 100%

Roof Advertising Signboard, Admiralty Centre, Advertising signboard – – 100% No. 18 Harcourt Road, Hong Kong

Ten Shop Units, First Floor Podium, Admiralty Centre, Shops 286 – 50% No. 18 Harcourt Road, Hong Kong

Olympian City One,Tai Kok Tsui, Kowloon Indoor sports hall 13,219 – 100%

Olympian City Two,Tai Kok Tsui, Kowloon Shop unit 1,252 – 100%

Note: The above properties are let to tenants for commercial use except Heng Fa Chuen Residents’Club House. All properties are held by the Company under leases for over 50 years except for Telford Plaza I and II, Luk Yeung Galleria, Maritime Square, New Kwai Fong Gardens, IFC and Olympian City where the leases expire on 30 June 2047.

Properties held for sale (as at 31 December 2004)

Gross floor No. of Company’s Location Type area (sq. m.) parking spaces ownership interest

Island Harbourview, No. 11 Hoi Fai Road, Kowloon Residential 6,792 – 40% Car park – 579 40%

Olympian City One, No. 11 Hoi Fai Road, Kowloon Shopping centre 6,048* – 40% Car park – 330 40%

Bank of China Centre, No. 11 Hoi Fai Road, Kowloon Car park – 117 40%

Sorrento,Union Square,No. 1 Austin Road West,Kowloon Residential 3,998 – 36.22% Car park – 149 67.05%

Residence Oasis, No. 15 Pui Shing Road, Hang Hau,Tseng Kwan O Residential 12,374 – 71% Car park – 321 71% Motorcycle park – 18 71%

* Lettable floor area

Managed properties (as at 31 December 2004)

Number of managed residential flats 49,283 units

Area of managed commercial and office space 558,796 sq. m. 40 Executive management’s report > Future Hong Kong projects

AsiaWorld-Expo Station Tung Chung Cable Car

Sunny Bay Station Disneyland Resort Station

Ngong Ping Theme Village

future Hong Kong projects investing in a shared future

42 Executive management’s report > Future Hong Kong projects

> Construction of Disneyland Resort Line progressing well for completion in July 2005 > Substantial progress achieved in construction of Tung Chung Cable Car > Discussions continue with the Government on South Island Line and West Island Line

We made further progress during 2004 known as the Penny’s Bay Rail Link, on projects to expand our integrated which will connect the theme park with rail-property infrastructure in Hong Kong the MTR network. and on enhancements designed to Construction of the Tai Yam Teng Tunnel integrate our system more closely into was completed in June. By year end the life of the community. In the process, architectural and builders works together the Company continued to engage in with the installation of electrical and active dialogue with the full range of mechanical equipment were substantially stakeholders to ensure that project completed for both Disneyland Resort plans are sensitive to the physical and Station and Sunny Bay Station, the social environments, while being interchange for the Tung Chung Line. economically sound. Automatic platform gates have been installed and conversion of rolling stock Disneyland Resort Line completed, with trains scheduled to With the opening of the Hong Kong begin test runs in January 2005. As a Disneyland scheduled for September result, the Company remains confident 2005, MTR again worked assiduously of meeting the target completion date of to ensure on-time completion of the 1 July 2005. Disneyland Resort Line, formerly Tung Chung Cable Car The Tung Chung Cable Car project that will create a major new tourist attraction for Hong Kong achieved substantial progress during the year. Construction work began in February 2004. Mules imported from Canada to transport materials in an environmentally appropriate manner arrived in May 2004

Construction has begun on the Theme Village at Ngong Ping, part of the Tung Chung Cable Car development MTR CORPORATION LIMITED ANNUAL REPORT 2004 43

and are now working in the Country Park. Construction of the terminals at Tung Chung and Ngong Ping is progressing well and by year end work had started on the Theme Village. Target completion of the project by early 2006 remains on track.

West Island Line and South Island Line In January 2003, the Government requested MTR to proceed with planning for the West Island Line and South Island Line. In March 2004, following extensive consultations, MTR submitted revised proposals to the Government.

The proposals contain three elements: an extension of the high capacity Island Line Plans for the Ngong Ping Theme Village include shops, to serve Western District; and two medium restaurants and museums capacity lines to serve the south side of Hong Kong Island. One of the medium capacity lines would interchange with the Island Line at Admiralty Station and serve Ocean Park,Wong Chuk Hang and Ap Lei South Station, which is located within to connect to the Authority’s new Chau. The other would interchange with the future “Dream City”property Skyplaza development. the Island Line extension in Western development. The station will be District and serve locations such as completed in 2009 along with the Pedestrianisation Cyberport,Wah Fu and Aberdeen, completion of the first package of Pedestrian links to MTR stations and terminating at the Wong Chuk Hang property development there. enhanced pedestrianisation adjacent to interchange station. Discussions continue stations continue to be an important with the Government on the scope and Airport developments strategy aimed at increasing patronage. programme for these new lines. Work proceeded on schedule for the new In January, developer funded construction AsiaWorld-Expo Station at the end of AEL Kwun Tong Line and Tseung began on the new Queensway subway at Hong Kong International Airport that Kwan O Line that will connect the Three Pacific Place will serve the AsiaWorld-Expo. This new In February, the Company also submitted commercial centre with the Admiralty station is scheduled for completion by to the Government proposals for an tunnel that runs between Admiralty end 2005. extension of the Kwun Tong Line from Station and the Pacific Place complex. Yau Ma Tei Station to Whampoa Gardens, The Company continues discussions Scheduled for completion by the end of a popular residential area. The Company with the Airport Authority over plans to 2005, the subway will provide easy access has invited proposals from consultants to expand the facilities at Airport Station to the MTR network from this high start detailed design of Tseung Kwan O pedestrian traffic site. 44 Executive management’s report > Human resources

human resources working together with vision and purpose MTR CORPORATION LIMITED ANNUAL REPORT 2004 45

Throughout the year, MTR continued to work closely with employees at all levels to maintain the support of our skilled, talented and committed workforce.

In line with the Company’s continuing August, bringing home key messages of Amongst the initiatives implemented in policy of productivity enhancement, the vision and strategy to all our employees. response to the Survey were “Meet the hiring freeze remained in force during CEO”and “Meet Senior Management” 2004 resulting in total staff numbers Merger talks programmes, which were designed to at the end of 2004 of 6,555 compared Another important focus was the possible improve direct communication between with 6,629 in 2003. Turnover per merger with KCRC and its potential staff and senior management. operating railway employee further implications for staff. During the year, we We recognise that middle management improved to HK$1.40 million as made tremendous efforts to ensure open communication skills are becoming ever compared to HK$1.27 million in 2003. and transparent communication on the more important in the smooth running of merger discussions, so that employees the Company’s operations and New Vision, Mission and were kept abreast of the progress and management, and have established Core Values able to voice their views. specific programmes to help our An important task during the year was managers and supervisors to improve the communication to all staff of the new Follow up to 2003 Staff those skills. During 2004, over 1,300 Vision, Mission and Core Values. These are Attitude Survey supervisory staff received training intended to drive the Company forward The comprehensive 2003 Staff Attitude through a “New Horizon for Supervisors” as it expands overseas and into new areas Survey had highlighted a number of training programme. of businesses, while remaining true to our important areas of employee concerns roots in Hong Kong. In all, 134 workshop and the Company took significant steps sessions were held between April and during 2004 to address those issues.

The Company is dedicated to promoting work life balance and encouraging staff participation in community and charity services

Total staff strength MTR continued business expansion and reported goods results with fewer staff members. 46 Executive management’s report > Human resources

Resource pool for growth comprehensive human resources policies Management System. The Company also business and systems, as well as training and received the “Most Innovative Award” To support the Company’s business development initiatives. from Hong Kong Management development outside Hong Kong, Association’s Excellence in Training MTR’s Human Resource Management Awards and accreditation programme and a “BEST Award”from Department has been acting as the During the year, we once again the American Society for Training and strategic partner of line managers in received several awards in recognition Development. providing professional advice and of our ability and achievement in personnel support to staff on overseas developing and managing our assignments. employees and workforce.

In addition, to meet human resource For the third consecutive time, MTR challenges posed by the expansion received the Good People Management of international business, MTR has Award from the Hong Kong Labour implemented a just-in-time manpower Department. The Operations Training resourcing strategy. This involved Department successfully gained building a dedicated resource pool for ISO9001, ISO14001 and OHSAS18001 growth business, backed by customised accreditations for its Integrated remuneration and employment terms,

Staff productivity – turnover per operating railway employee Continuous improvement in productivity has been achieved throughout the years. MTR CORPORATION LIMITED ANNUAL REPORT 2004 47 Financial review

Review of 2004 financial results tickets and an increase in free-ride tickets issued through the “Ride 10 Get 1 Free”promotion campaign, the average fare Profit and loss dropped slightly from HK$6.57 in 2003 to HK$6.50. Total patronage for the MTR Lines, comprising the Urban Lines, The average daily patronage on AEL rose by 16.6% to 21,800 the Tung Chung Line and the Tseung Kwan O Line, increased from 18,700 in 2003, mainly due to the strong recovery of air significantly from 770 million in 2003 to 834 million in 2004, passenger arrivals and departures at the Hong Kong following a recovery from the adverse effect of SARS in 2003 and International Airport. However, MTR’s estimated market share of an improved economic environment in 2004. Additional passengers travelling to and from the airport reduced from 23% patronage also resulted from the opening of the West Rail in 2003 to 21% mainly as a result of a change in the mix of Interchange and a strong increase in tourist arrivals from the visitors. Total revenue from AEL increased by 21.2% to HK$515 Mainland. Average weekday patronage for the year improved to million, with the average fare improving from HK$62.07 to 2.40 million from 2.24 million in 2003. MTR’s overall share of total HK$64.25 in 2004. franchised public transport rose to 24.8% from 24.3% in 2003, while the cross-harbour market share increased from 58.7% in Non-fare revenue grew strongly by 14.9%, from HK$2,105 million 2003 to 59.6%. in 2003 to HK$2,419 million, comprising HK$1,311 million from station commercial and other revenue and HK$1,108 million Total fare revenue for the MTR Lines amounted to HK$5,417 from property rental and management. Compared to 2003, a million, which was a 7.0% increase from HK$5,064 million in 2003. growth of 17.4% was achieved for station commercial and other With a higher proportion of passengers using concessionary revenue, mainly due to significant increases in advertising and

Operating profit contributions Net results The contribution to operating profit from railway Recovery from SARS, the economic rebound and continuous cost operations increased. containment supported a very good overall performance. 48 Financial review

telecommunication income resulting from the strong recovery in Operating profit from railway and related operations before consumer spending. Property rental and management income depreciation and interest amounted to HK$4,546 million, increased by 12.1% compared with 2003, mainly attributable to a an increase of 21.3% from HK$3,747 million in 2003. Operating full year operation of Two IFC, an expanded portfolio of managed margin was 54.4% compared with 49.3% in 2003. properties, higher rental renewal rates, and the removal of Profit on property development was HK$ 4,568 million as SARS rental concessions granted in 2003. compared with HK$5,369 million in 2003, comprising mainly Despite a general increase in business activities during 2004, sharing in kind in respect of part of the Union Square retail shell operating costs were well contained and there were continued structure at Kowloon Station, recognition of deferred income gains in productivity. As a result, operating expenses before relating to Caribbean Coast and Coastal Skyline at Tung Chung depreciation decreased 1.1% from HK$3,847 million in 2003 to Station and The Harbourside at Kowloon Station in line HK$3,805 million. Apart from a reduction in staff costs from with construction progress, and surplus proceeds from The HK$1,643 million in 2003 to HK$1,542 million in 2004 mainly due Harbourside at Kowloon Station and from Residence Oasis at to lower pension expenses, there was a HK$69 million write-back Hang Hau Station in Tseung Kwan O. of property revaluation deficit on our head office building made Operating profit before depreciation was HK$9,114 million, in 2003, owing to a strong recovery in property prices. These almost the same as in 2003. Depreciation charges increased by were, however, partly offset by higher Government rent and 4.6% to HK$2,512 million from HK$2,402 million in 2003, mainly rates, which increased from HK$21 million in 2003 to HK$70 due to a full year’s depreciation in respect of the West Rail million in 2004 due to a substantial rate refund in 2003, higher Interchange facilities following its commissioning in December maintenance costs of HK$517 million resulting from the expiry 2003, and depreciation on new railway assets including platform of warranty periods in respect of most of the Tseung Kwan O Line screen doors and station improvement works. assets, and higher project study and business development costs incurred during 2004 in line with the Company’s Net interest expenses decreased from HK$1,539 million in 2003 strategy to expand our business development in the Mainland to HK$1,450 million as a result of the lower interest rate and in Europe.

Turnover Operating expenses Proportion of fare revenue reduced following double-digit growth in Staff costs were lower, mainly due to lower pension expenses non-fare revenues. and gain in productivity. MTR CORPORATION LIMITED ANNUAL REPORT 2004 49

environment and reduced borrowings. The average interest rate extent necessary to ensure that a maximum of 50% of MTR’s total paid by the Company reduced from 5.1% in 2003 to 4.7% in 2004 dividend will be paid in cash. whilst the interest cover increased to 6.1 times from 5.6 times in 2003 in line with the increase in operating profit. Balance sheet The Group’s balance sheet remained strong, with the bulk of our The Company’s share of Octopus Cards Limited’s pre-tax assets invested in the railway system. Total fixed assets increased earnings was HK$44 million for the year. Income tax expenses from HK$96,921 million in 2003 to HK$100,313 million as at decreased by 6.4% from HK$748 million in 2003 to HK$700 31 December 2004, mainly attributable to receipt of the shell of million, mainly due to the prior year effect of a deferred tax a retail centre and surpluses in investment property revaluation. adjustment of HK$300 million upon an increase in the Profits Tax rate in 2003, which was partly off-set by higher deferred tax Railway construction in progress increased from HK$181 million expense on the 2004 property development profit. As a result, in 2003 to HK$962 million as at 31 December 2004, comprising the Group’s profit attributable to shareholders for the year was additional capital expenditures on the Disneyland Resort Line, HK$4,496 million, an increase of 1.0% compared to HK$4,450 Tung Chung Cable Car and AsiaWorld-Expo Station projects. million in 2003. Earnings per share decreased slightly from Property development in progress represents the costs incurred HK$0.85 to HK$0.84 due to new shares issued during the year for in preparation of sites for property development less scrip dividend and share options exercised. reimbursement already received from developers. Property The Board has recommended a final dividend of HK$0.28 per development in progress at the year end amounted to HK$2,088 share, amounting in total to HK$1,509 million, with a scrip million, a decrease of 9.6% from the previous year’s HK$2,309 dividend option offered to all shareholders with Hong Kong million, mainly due to transfer out of the account of development addresses. As in previous years, the Government has agreed to costs in respect of Hang Hau property development project upon receive its entitlement to dividends in the form of shares to the its completion.

Fixed assets growth Operating margin Total fixed assets rose, following receipt of a retail shell and surpluses in Improved productivity and higher revenues lifted operating margin. property revaluation. 50 Financial review

Cash and cash equivalents decreased to HK$269 million as at development projects also increased from HK$855 million for 31 December 2004 from HK$376 million as at 2003 year end. the previous year to HK$2,576 million. Outflows for capital project payments and interest expenses amounted to HK$2,889 Total loans outstanding at year-end were HK$30,378 million, a million and HK$1,301 million respectively, as compared to decrease of HK$1,647 million compared with 2003 due to loan HK$2,670 million and HK$1,643 million for the previous year. repayments. Loans drawn down during the year amounted to Together with other minor movements, net cash flow before HK$7,194 million which were primarily for refinancing purposes. dividends and loan repayments were HK$2,566 million, being Deferred income decreased from HK$5,061 million in 2003 to HK$2,109 million higher than the previous year. After dividend HK$4,638 million following profit recognition at Tung Chung and payments of HK$1,079 million and net loan repayment of Kowloon station developments in accordance with the progress HK$1,593 million, there were net cash outflows of HK$106 million of property construction and pre-sales programmes. This was compared to net outflows of HK$1,320 million in 2003. partly offset by an increase in the transfer-in of deferred income in respect of the retail shell structure at Kowloon Station. Revised accounting standards in 2005 Following the convergence of the Hong Kong Accounting Our share capital, share premium and capital reserve Standards with the International Accounting Standards from of HK$36,269 million at year end was HK$1,183 million higher 1 January 2005, the accounting standards in Hong Kong have than in 2003, as a result of shares issued for scrip dividend and been substantially revised and the Company’s future financial share options exercised. Together with increases in property statements and results will be affected by a number of revaluation reserves of HK$2,759 million and retained earnings accounting changes in the coming year, notably those relating net of dividend of HK$2,265 million, total shareholders’funds to valuation of investment properties and financial instruments. increased to HK$63,499 million from HK$57,292 million as at Previously, changes in the fair value of investment properties 31 December 2003. As a result, the Group’s gross debt-to-equity arising from revaluation had been generally recognised through ratio improved from 55.9% to 47.8% at 2004 year-end and net the reserve account on a portfolio basis without impacting the debt-to-equity ratio from 55.2% to 47.4%. Profit and Loss Account (P&L). However, after 1 January 2005, these revaluation gains or losses are required to be brought Cash flow through the P&L. With the volatility of property prices being a Net cash inflow generated from railway and related activities characteristic of the Hong Kong market, this new accounting increased from HK$3,837 million in 2003 to HK$4,486 million standard could have a significant impact on the level and for the year, while cash receipts from developers for property consistency of our reported profit.

The new accounting standard relating to financial instruments requires that after 1 January 2005 all financial instruments which the Company is using to hedge the interest rate and currency risks of our borrowings must be marked to market, with any change in their fair values recognised in the P&L directly. However, the standard allows the application of hedge accounting, that is, to use the change in fair value of the underlying hedged items to offset this impact so that only inefficiency in the hedging relationship resulting in net residual impact will be reported in the P&L. Given that hedge efficiency is affected by a number of factors including the nature of the hedging relationship, direction of interest rates and changes in foreign exchange rates, it is difficult to forecast and control this residual impact.

It should be stressed, however, that both of these items are non-cash items and hence do not affect cash flow. Apart from Debt/equity profile these, the revised standards introduced a number of other minor Reduced borrowings and increase in shareholders’ funds improved changes mainly on alignment of disclosure with the international the debt/equity profile. standards which will be reflected in the 2005 accounts. MTR CORPORATION LIMITED ANNUAL REPORT 2004 51

Financing activities further extend our debt maturity profile, but also to establish a new 10-year US dollar benchmark for Hong Kong’s New financings quasi-sovereign credits. In June 2004, in an effort to pre-empt inflation, the US Federal Despite the actions of the Federal Reserve, interest rates in Reserve started to remove the extra stimulus in its monetary Hong Kong remained low throughout the year as a result of policy successively raising the Fed Funds target rate from a continuing strong capital inflow amid speculation of an historical low of 1.0% to 2.25% by the end of the year. Prior to the imminent revaluation of the Renminbi and strong IPO activities. Federal Reserve’s decision, the Group took advantage of the Later in the year, the Group took advantage of these favourable favourable market conditions resulting from strong global conditions to tap the Hong Kong dollar fixed rate market and liquidity and a benign inflation outlook to successfully launch a arrange a total of HK$500 million fixed rate bonds, comprising US$600 million 10-year fixed rate bond in January. The offering HK$200 million in 12-year and HK$300 million in 15-year with a attracted strong interest, with total subscriptions of close to coupon rate of respectively 4.51% and 4.95%. US$1.9 billion from over 130 accounts representing a diverse group of institutional investors including banks, insurance At the end of 2004, the Company had total undrawn committed companies, pension funds and money managers across Asia facilities amounting to HK$5.8 billion which is sufficient to and Europe. provide coverage for all of the Company’s expected funding needs into the second quarter of 2006. This very strong demand together with the historical low rates enabled the Group to price the bond at an attractive re-offer Cost of borrowing spread of 83 basis points over the comparable yield of 10-year The attractive terms of the new financings together with low treasuries with a coupon rate of 4.75%, and to increase the size of interest rates prevailing during the year enabled the Group to the transaction to US$600 million from the originally planned reduce further our overall borrowing cost to 4.7% from 5.1% US$500 million. The transaction enabled the Group not only to in 2003, resulting in a reduction of gross interest expense by obtain very cost-effective fixed rate long-term funding and HK$149 million.

Sources of borrowing Debt servicing capability While Hong Kong remains our main market, MTR continued to The Company’s balance sheet strengthened with improved interest cover. diversify its funding sources. 52 Financial review

Risk management Credit ratings We continued to undertake our fund raising activities and The Company was the first Hong Kong corporate borrower to manage our debt portfolio in accordance with our obtain internationally recognised credit ratings and has since well-established Preferred Financing Model, which seeks to maintained ratings on par with the Hong Kong Government due achieve risk diversification by specifying the preferred mix of to our strong credit fundamentals, prudent financial fixed and floating rate debts, permitted level of currency management and continuous Government support. exposure, a well-balanced spread of maturities, use of different In February, Moody’s re-affirmed the Company’s short-term types of financing instruments in our debt portfolio, and an foreign currency rating and long-term domestic/foreign currency adequate financing horizon to cover future funding needs. ratings at respectively P-1 and Aa3/A1 with a stable outlook. As a result, the Company was able to maintain a balanced debt profile with adequate risk diversification and sufficient coverage Standard & Poor’s also affirmed our ratings at A-1+/A-1 and of anticipated future funding needs. AA-/A+ for short-term local/foreign currency and long-term local/foreign currency borrowings respectively in April with a The Company is one of the most active corporate users of negative/stable outlook respectively on the local and foreign derivative instruments in Hong Kong for managing the exposure currency ratings. It subsequently revised our local currency of its debt portfolio to interest rate and currency risks. The ratings outlook from negative to stable in June following a Company’s policy states that derivatives are used solely similar change to Hong Kong’s local currency sovereign ratings. for hedging purposes and not for speculation, and that they are only to be transacted with counterparties with a credit rating of Credit ratings A-/A3 or better to control counterparty risk. In addition, the Short-term ratings* Long-term ratings* Company has long adopted a risk monitoring framework based Standard & Poor’s A-1+/A-1 AA-/A+ on the widely accepted “value-at-risk”methodology and an Moody’s –/P-1 Aa3/A1

“expected loss”concept to help further monitor and control Rating and Investment counterparty risk exposure. Information Inc. (R&I) a.1+/– AA/AA-

* Ratings for Hong Kong dollar/ foreign currency denominated debts respectively.

In October, R&I also re-affirmed the Company’s short-term local currency and long-term domestic/foreign currency ratings at respectively a•1+ and AA/AA-.

Financial planning During the year, we continued to use our well established and comprehensive long-term financial planning model based on widely accepted methodologies, to plan our railway operations and to evaluate new projects and investments. For new projects, the model subjects all investment proposals to a rigorous evaluation process that takes into account our weighted average cost of capital and a required rate of return, supplemented by necessary sensitivity tests on key variables. In addition, we carefully review all key assumptions used in the model periodically and as part of our annual budgeting exercise to ensure they are prudent and realistic, taking into account present business and economic conditions, and future likely changes. To manage our cost of capital effectively, we also undertake regular detailed assessment of our funding requirement and capital structure. Use of interest rate and currency risk hedging products MTR is an active user of derivatives, solely for hedging borrowing related interest rate and currency risks. MTR CORPORATION LIMITED ANNUAL REPORT 2004 53

Financing capacity The estimated total investment of RMB 6 billion (HK$5.7 billion) The Company’s current committed capital expenditure for Shenzhen Line 4 will be funded by 40% equity and 60% programme comprises mainly the maintenance and upgrade of non-recourse bank loans in Renminbi. MTR’s investment in the existing lines, 50% land premium of Tseung Kwan O Area 86 Beijing Line 4 will be represented by our 49% shareholding in Package One, and the construction of the Disneyland Resort Line the PPP company which is responsible for the trains and related and Tung Chung Cable Car, both of which are well advanced in electrical and mechanical systems which are estimated at construction towards their respective target completions in 2005 RMB 5.0 billion (HK$4.7 billion). It is planned that more than and 2006. Our committed capital expenditure programme for 60% of the investment by the PPP company will be funded by the three years between 2005 and 2007 is thus expected to be non-recourse bank loans in Renminbi with the balance financed modest with a budget of around HK$6.8 billion. by equity capital. MTR’s equity investment in the PPP company therefore is estimated at around RMB735 million (HK$693 This modest programme means that MTR will have sufficient million). We anticipate that MTR’s total equity investment of financing capacity to take advantage of new investment slightly above RMB 3 billion (HK$2.8 billion) in these two projects opportunities as and when they arise, including those in the will be financed by a combination of internally generated funds Mainland such as Shenzhen Line 4 and Beijing Line 4, for and external borrowing by the Company. which we are negotiating the relevant agreements and seeking approvals from the various authorities, as well as those in The capital structure and funding alternatives for the SIL and WIL Hong Kong such as the SIL and WIL extensions. as well as the Kwun Tong Line extension, in respect of which MTR submitted proposals to the Government, will be examined at a later stage if and when Government approvals are obtained.

Investment in new railway lines and the Preferred financing model and debt profile existing network MTR's disciplined approach to debt management ensures a well The Company’s capital expenditure increased in 2004, mainly due to balanced and diversified debt portfolio. construction of the Disneyland Resort Line. 54 Ten-year statistics

2004* 2003* 2002* 2001* 2000* 1999 1998 1997 1996 1995

Financial

Profit and loss account in HK$ million

Turnover 8,351 7,594 7,686 7,592 7,577 7,252 6,981 6,574 6,253 5,737

Operating profit before depreciation 9,114 9,116 7,769 7,301 7,290 5,523 4,720 3,805 3,342 3,143

Depreciation 2,512 2,402 2,470 2,178 2,091 2,039 1,426 927 850 658

Interest and finance charges 1,450 1,539 1,125 874 1,143 1,104 475 95 957 1,289

Profit 4,496 4,450 3,579 4,278 4,069 2,116 2,819 2,783 1,535 1,196

Dividend proposed and declared 2,259 2,215 2,161 2,118 500 – – 1,252 647 –

Earnings per share in HK$ 0.84 0.850.700.850.810.42––––

Balance sheet in HK$ million

Total assets 106,674 102,366 101,119 98,126 92,565 87,250 82,104 75,428 64,644 45,356

Loans, obligations under finance leases and bank overdrafts 30,378 32,025 33,508 31,385 27,203 23,177 16,897 10,875 12,696 14,736

Deferred income 4,638 5,061 6,226 8,411 10,403 13,776 15,970 16,705 9,094 1,056

Shareholders’funds 63,499 57,292 53,574 53,893 50,355 45,115 42,601 41,815 35,473 25,261

Financial ratios in percentage

Operating margin 54.4 49.3 52.2 53.4 51.7 48.2 47.3 53.7 53.4 54.8

Non-fare revenue as a percentage of turnover 29.0 27.7 25.6 24.6 24.6 22.2 22.1 21.0 18.8 17.8

Gross debt-to-equity ratio 47.8 55.9 62.5 58.2 54.0 51.4 39.7 26.0 35.8 58.3

Gross debt-to-equity ratio (excluding revaluation reserves) 56.2 63.3 71.1 66.4 62.2 58.5 45.0 31.3 43.8 73.4

Interest cover in times 6.1 5.6 4.5 3.8 3.8 3.7 5.1 15.7 4.0 2.9

Employees

Corporate management and service departments 860 855 886 930 966 1,031 1,317 1,104 1,069 1,075

Operations 4,669 4,730 4,836 4,756 4,943 5,132 5,890 4,575 4,499 4,490

Engineering and project 366 402 551 978 904 918 1,111 2,380 1,871 1,444

Property development and management 660 642 618 567 519 456 468 427 405 388

Total 6,555 6,629 6,891 7,231 7,332 7,537 8,786 8,486 7,844 7,397 MTR CORPORATION LIMITED ANNUAL REPORT 2004 55

2004* 2003* 2002* 2001* 2000* 1999 1998 1997 1996 1995

Railway operations Revenue car km operated in thousands MTR Lines 114,364 112,823 103,318 96,751 92,199 94,704 94,260 84,258 83,769 82,472 Airport Express Line 16,081 15,227 19,467 19,458 19,557 19,394 9,011 – – –

Total number of passengers in thousands MTR Lines 833,550 770,419 777,210 758,421 767,416 779,309 793,602 811,897 816,572 812,519 Airport Express Line 8,015 6,849 8,457 9,022 10,349 10,396 3,928 – – –

Average number of passengers in thousands MTR Lines – weekday average 2,403 2,240 2,261 2,231 2,240 2,284 2,326 2,382 2,379 2,377 Airport Express Line – daily average 22 19 23 25 28 29 22 – – –

Average passenger km travelled MTR Lines 7.7 7.7 7.6 7.4 7.3 7.4 7.4 7.4 7.5 7.5 Airport Express Line 30.2 29.7 29.9 29.8 29.7 29.9 31.2 – – –

Average car occupancy MTR Lines 56 53 57 58 61 61 62 71 73 74 Airport Express Line 15 13 13 14 16 16 14 – – –

Proportion of franchised public transport boardings in percentage All movements 24.8 24.3 23.5 23.5 24.1 25.2 25.7 25.9 26.7 27.4 Cross-harbour movements 59.6 58.7 58.2 57.4 57.9 60.3 61.9 64.2 66.5 67.6

Proportion of transport boardings in percentage To/from the airport 21 23 25 27 28 32 25 – – –

HK$ per car km operated (all services) Fare revenue 45.5 42.9 46.6 49.3 51.1 49.4 52.7 61.6 60.6 57.2 Railway operating costs 22.1 22.5 22.8 24.6 26.8 27.3 29.2 29.5 29.1 26.0 Railway operating profit 23.4 20.4 23.8 24.7 24.3 22.1 23.5 32.1 31.5 31.2

HK$ per passenger carried (all services) Fare revenue 7.05 7.06 7.28 7.46 7.35 7.14 6.82 6.39 6.22 5.80 Railway operating costs 3.43 3.70 3.57 3.72 3.85 3.94 3.78 3.06 2.99 2.64 Railway operating profit 3.62 3.36 3.71 3.74 3.50 3.20 3.04 3.33 3.23 3.16

Safety performance Number of incidents 701 641 690 686 748 859 842 814 869 716 Incidents per million passengers carried 0.83 0.82 0.88 0.89 0.96 1.09 1.05 1.00 1.06 0.88 Number of staff and contractors’staff accidents 25 33 24 39 36 49 65 54 40 42

* Consolidated results 56 Investor relations

Investors and MTR We also demonstrated our commitment to Sustainability Index and the FTSE4Good Index. MTR has one of the largest bases of both addressing investor’s interests and needs by MTR remains one of the few companies from institutional and retail investors among the participating in a significant number of Hong Kong which is able to meet and companies listed in Hong Kong. Management regional and global investor conferences. maintain the globally recognised standards believes that shareholder value can be required for inclusion in these indices. enhanced by clearly communicating the Supporting our 360,000 retail Company’s corporate strategies, business shareholders Dissemination of Company development and future outlook through a As at 31 December 2004 the Company had information continuous and active process of dialogue over 360,000 retail shareholders, giving us one In line with our strategy to provide timely with existing and potential investors. of the largest shareholder bases amongst disclosure of information about the Company’s Hong Kong listed companies. To ensure these messages are communicated operations and finances, we exploit the latest technology to further improve the clearly and effectively, we are committed to To ensure all shareholders have equal and dissemination of information. providing regular, full and timely information on timely access to important company our developments that may affect interests of information, MTR makes extensive use of the Our corporate website, particularly the investor our capital providers. During the past two company website to deliver investor information section, provides the investor decades, MTR has established a strong information such as results announcements, community with an efficient channel to access reputation in the international capital markets news releases and annual and interim reports. information on the Company’s latest business as a company firmly committed to a high In addition, we have established a dedicated developments, operational and financial standard of corporate governance and hotline to answer individual shareholders’ performance. Key operating statistics such as disclosure, and thus is now widely recognised enquiries. Operated by the Company’s patronage numbers which are of particular as a leader in investor relations practices in Asia. Corporate Relations Department, this hotline interest to the investment community are handled more than 33,000 such telephone updated every month and posted on the Communicating with institutional calls in 2004. website for timely delivery. investors In recognition of our shareholders’support, we Our annual and interim reports are available in MTR’s persistent efforts in, and proactive again in 2004 offered a 40% special discount both summary version and full version, in approach to, investor relations have made us for travel on the AEL and produced a set of English or Chinese. Shareholders can, based one of the most widely covered companies in limited edition souvenir tickets, exclusively for on their preference and needs, choose to the region. Around 20 local and international MTR shareholders. receive different versions of these reports. research houses currently publish reports on These reports, together with US Securities MTR on a regular basis and we are also Index recognition and Exchange required reports and other followed by analysts from a wide range of Our position in the Hong Kong market as a stock exchange filings, are also accessible on buy-side institutions. blue chip stock with a sizable market our website. Management remains dedicated to developing capitalisation and a high degree of liquidity is direct communications with the investment affirmed through the continued inclusion of Market recognition community to ensure a thorough our stock in some of the most important The Company’s 2003 Annual Report again won understanding of the Company and its business benchmark indices. We are currently a the Silver Award under the “General Category” and strategies. During 2004, as in the past years, constituent member of the Hang Seng Index, in the 2004 Best Annual Reports competition in addition to a comprehensive investor MSCI and FTSE Index series. organised by the HKMA. This marked the 16th relations programme in Hong Kong, senior consecutive year since 1988 that the Company’s Since 2002, our efforts and achievements in management visited major international annual report has been awarded by the organiser. the fields of corporate social responsibility and investment centres including London, New sustainability have been continually York, Boston, Los Angeles, San Francisco and recognised by both the Dow Jones Singapore to engage in dialogues with institutional investors. In all, over 150 meetings with institutional investors and research analysts were held. MTR CORPORATION LIMITED ANNUAL REPORT 2004 57

Key Shareholder Information Dividend per share (in HK$) Financial calendar 2005 2003 Final Dividend 0.28 2004 Interim Dividend 0.14 Announcement of 2004 results 1 March 2004 Final Dividend 0.28 Last day to register for 2004 final dividend 22 March Book closure period 23 March to 1 April ADR Level 1 Programme Annual General Meeting 2 June Ordinary share to ADR ratio 10:1 2004 final dividend payment date on or about 21 June Depository Bank JP Morgan Chase Bank Announcement of 2005 interim results August 40th Floor, One Chase Manhattan Plaza 2005 interim dividend payment date October New York, NY 10081 Financial year end 31 December USA

Index Constituent Registered office MTR Corporation Limited is a constituent of the following indices: MTR Corporation Limited Hang Seng Index Series MTR Tower,Telford Plaza, Kowloon Bay, Hong Kong MSCI Index Series Telephone: (852) 2993 2111 Facsimile: (852) 2798 8822 FTSE All-World Hong Kong Index FTSE4Good Global Index Website Dow Jones Sustainability World Index www.mtr.com.hk Stock codes Share information Ordinary Shares Listing The Stock Exchange of Hong Kong 66 MTR Corporation Limited’s shares are listed on The Stock Exchange of Reuters 0066.HK Hong Kong. In addition, shares are traded in the United States through Bloomberg 66 HK an American Depository Receipt (ADR) Level 1 Programme sponsored by CUSIP Reference Number Y5896Y104 JP Morgan Chase Bank. The shares are also quoted on the London SEAQ Sedol Reference Number 6290054 International System. ADR Level 1 Programme MTRJY Ordinary shares (as at 31 December 2004): Shares outstanding: 5,389,999,974 shares Annual report 2004 Hong Kong SAR Government shareholding: 4,121,262,921 shares (76.46%) Our annual report is available in both English and Chinese. Shareholders Free float: 1,268,737,053 shares (23.54%) can obtain copies by writing to: Nominal value HK$1 per share Computershare Hong Kong Investor Services Limited Market Capitalisation (as at 31 December 2004): HK$67,105 million 46th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong

Share price performance If you are not a shareholder, please write to: Corporate Relations Department, MTR Corporation Limited MTR Tower,Telford Plaza, Kowloon Bay, Hong Kong

Our annual/interim reports and accounts are also available online at our corporate website at www.mtr.com.hk

Shareholder services Any matters relating to your shareholding, such as transfer of shares, change of name or address, and loss of share certificates should be addressed in writing to the Registrar: Computershare Hong Kong Investor Services Limited, Shops 1712 -1716, 17th Floor, Hopewell Centre, 183 Queen’s Road East, Hong Kong Telephone: (852) 2862 8628 Facsimile: (852) 2529 6087

Shareholder enquiries Our enquiry hotline is operational during normal office hours: Dividend Policy Telephone: (852) 2881 8888 Subject to the financial performance of the Company, we expect to pay two dividends each financial year with interim and final dividends Investor relations payable around October and June respectively, with the interim dividend For enquiries from institutional investors and securities analysts, representing approximately one third of the total dividends to be paid please contact: for the entire year. Investor Relations Department, MTR Corporation Limited MTR Tower,Telford Plaza, Kowloon Bay, Hong Kong Email: [email protected] 58 Sustainability

The concept of corporate “sustainability”continues its evolution, combining risk management with stakeholder engagement. As a company committed to sustainability, MTR continues to learn from both internal and external experience, engage in dialogue with the full range of stakeholders and ensure a robust infrastructure of internal governance and management systems.

Focus on sustainability Sustainability overseas Our Sustainability Report, for the third infrastructure MTR’s overseas businesses, especially year adhering to the GRI guidelines, was During the year, particular emphasis was those in the Mainland, are bringing new included in the GRI’s top 100 reports and placed on a review of the sustainability challenges to sustainable practices and named Best Sustainability Report by the infrastructure and subsequent we are reviewing the best ways of Association of Chartered Certified strengthening of systems to ensure that embedding best practices into overseas Accountants. The complete report is we adopt future best practices and have projects. During the year, we continued to available on our corporate website at the ability to meet with challenges posed adapt existing business models, codes of www.mtr.com.hk. by the Company’s strategic initiatives. conduct, training and best practices for integration into such projects, as well The way forward In the area of reporting, we aimed to as developing our own practices as a Looking ahead, we recognise that we ensure the integrity of necessary member of the supply chain. must be prepared for challenges that information and data for decision- may change the footprint of the making through the adoption of an Achievements in best practice organisation as it is today. This will require assurance programme devised by MTR’s environmental impact remained a systemised yet flexible approach to best PricewaterhouseCoopers and the fully compliant with all of Hong Kong’s practice in the event of a merger and in development of a new Enterprise-Wide pollution ordinances. More broadly, relation to the further internationalisation Risk Management System. These systems MTR continued to participate in global of the Company’s businesses, especially in enable effective monitoring and tracking industry efforts to improve sustainability developing countries. of best practices across MTR businesses practice and in benchmarking exercises and operations. MTR’s Sustainability Report will also have that provide objective measurements for to evolve as both an internal and external We also enhanced our processes to our progress and practices. We continued guideline and benchmark for formulating engage with stakeholders, by initiating our contribution to the UITP Working best practices to meet these challenges, extensive consultations on the proposed Group on Sustainable Development and risks and opportunities. WIL and SIL and establishing a gained international recognition for Sustainability Advisory Board in our efforts in this area. MTR continued connection with the Tung Chung Cable to be included in the Dow Jones Car project. Sustainability and FSTE4Good indices. MTR CORPORATION LIMITED ANNUAL REPORT 2004 59 Corporate governance

The Company is committed to ensuring high standards of The posts of Chairman and Chief Executive Officer are distinct corporate governance in the interests of shareholders and and separate. The non-executive Chairman is responsible for devotes considerable effort to identifying and formalising chairing and managing the operations of the Board, as well as best practices. monitoring the performance of the Chief Executive Officer and members of the Executive Directorate. Apart from ensuring The Board of Directors adequate information about the Company’s business is provided The overall management of the Company’s business is vested to the Board on a timely basis, the Chairman also facilitates in the Board. Pursuant to the Articles of Association and the effective contribution of non-executive Directors at Board Protocol adopted by the Board, the Board has delegated the meetings. As head of the Executive Directorate, the Chief day-to-day management of the Company’s business to the Executive Officer is responsible to the Board for managing the Executive Directorate, and focuses its attention on matters business of the Company. affecting the Company’s overall strategic policies, finances and The Board meets in person regularly, and all members of the shareholders. These include financial statements, dividend policy, Board have full and timely access to relevant information and may significant changes in accounting policy, the annual operating take independent professional advice, if necessary. In year 2004, budget, certain material contracts, strategies for future growth, the Board held eight meetings, of which the possible merger major financing arrangements and major investments, risk between the Company and Kowloon-Canton Railway Corporation management strategies, treasury policies and fare structures. (“KCRC”) was discussed at seven meetings by members of the The Board comprises 11 members, consisting of one executive Board who did not have conflicts of interest. In addition, two Director (the Chief Executive Officer) and ten non-executive meetings solely on the possible merger were held during the year Directors, of whom six are independent non-executive Directors. by those members who did not have conflicts of interest. The Following the Board’s decision to split the roles of Chairman and attendance record of each member of the Board is set out below: Chief Executive Officer, Dr. Raymond Ch’ien Kuo-fung, already a Attendance of Board Attendance member of the Board, was appointed non-executive Chairman Directors meetings in 2004 rate for three years with effect from 21 July 2003, and Mr. Chow Chung-kong was appointed Chief Executive Officer and a Non-executive Directors member of the Board on 1 December 2003. Two of the other Dr. Raymond Ch’ien Kuo-fung 9/10 90% non-executive Directors (being the Secretary for the (Chairman) Environment,Transport and Works and the Commissioner for Commissioner for Transport 8/8 100% Transport) are appointed by the Chief Executive of the HKSAR. (Robert Charles Law Footman) Another non-executive Director, Mr. Frederick Ma Si-hang, is the Secretary for the Environment, 8/8* 100% Secretary for Financial Services and the Treasury of the Transport and Works Government of the HKSAR. The Government of the HKSAR (Dr. Sarah Liao Sau-tung) through The Financial Secretary Incorporated, holds * 4 meetings were attended by alternate directors approximately 76% of the issued share capital of the Company. Frederick Ma Si-hang 8/8 † 100% Coming from diverse business and professional backgrounds, † 3 meetings were attended by alternate director the non-executive Directors actively bring their valuable Independent Non-executive Directors experience to the Board for promoting the best interests of the Professor Cheung Yau-kai 6/10 60% Company and its shareholders. On the other hand, independent non-executive Directors contribute to ensuring that interests of David Gordon Eldon 4/8 50% all shareholders of the Company are taken into account by the Christine Fang Meng-sang 9/10 90% Board and that relevant issues are subjected to objective and Edward Ho Sing-tin 10/10 100% dispassionate consideration by the Board. The Company has Lo Chung-hing 10/10 100% received confirmation from each independent non-executive Director about his/her independence under the Listing Rules, T. Brian Stevenson 10/10 100% and continues to consider each of them to be independent. Executive Director None of the Directors or members of the Executive Directorate Chow Chung-kong 10/10 100% is related to each other. (Chief Executive Officer) 60 Corporate governance

A person may be appointed as a member of the Board at any statements, and discusses with the external auditors the nature time either by the shareholders in general meeting or by the and scope of audit before the audit commences. It also reviews Board upon recommendation of the Nominations Committee. and approves non-audit services. The Audit Committee conducts Directors who are appointed by the Board must retire at the first an assessment, at least annually, of the effectiveness of the annual general meeting after their appointment. In either case, Company’s systems of internal control. These systems allow the the Directors so elected and appointed are eligible for re-election Board to monitor the Company’s overall financial position and to and re-appointment. At each annual general meeting of the protect its assets. In addition, the Committee reviews the internal Company, one third of the Directors (or such number as is audit function. The Audit Committee selects, in consultation with nearest to and less than one third) are required to retire from the Chairman and Members of Executive Directorate (or office by rotation. otherwise to approve) any topic to be the subject of an audit into the efficiency, effectiveness or value for money of any of the The Chief Executive of the HKSAR may, pursuant to Section 8 of activities or operations of the Company. It then reviews reports of the MTR Ordinance, appoint up to three persons as “additional such audit and puts forward recommendations to the Board. The directors”. Unless the Chief Executive of the HKSAR otherwise chairman of the Committee summarises activities of the directs, the Directors appointed in this way may not be removed Committee for the year and highlights issues arising therefrom in from office and they are not subject to any requirement to retire a report to the Board. by rotation stated in the preceding paragraph. In all other respects,“additional directors”are treated for all purposes in the In year 2004, the Audit Committee held four meetings. The same way as other Directors. The Chief Executive has appointed attendance record of each Audit Committee member is set out the Office for the Secretary for Environment,Transport and below. Representatives of the external auditors, the Finance Works and the Office for Commissioner for Transport as Director and the Head of Internal Audit Department attended all “additional directors”. those meetings for reporting and answering questions about their work. Further to that and by invitation, Managing Director – Each of the Directors, on appointment to the Board, is given a Operations and Business Development and Property Director had comprehensive induction programme on key areas of business respectively provided an overview of the Company’s railway operations and practices of the Company, as well as a Directors’ operations and property business to the members at a meeting. Manual. Amongst other things, the Manual not only sets out general and specific duties of Directors under general law Attendance of (common law and legislation) and the Listing Rules, but also the Audit Committee Attendance Directors meetings in 2004 rate Terms of Reference of Board Committees. The Directors’Manuals are updated from time to time to reflect developments in T. Brian Stevenson (chairman) 4/4 100% those areas. Professor Cheung Yau-kai 4/4 100%

Commissioner for Transport 4/4 100% Board Committees (Robert Charles Law Footman) As an integral part of good corporate governance, the Board has established the following Board Committees to oversee Remuneration Committee particular aspects of the Company’s affairs. Each of these The Remuneration Committee consists of three non-executive Committees comprise entirely non-executive Directors who have Directors, two of whom are independent non-executive Directors. been invited to serve as members. The Committees are governed The members of the Remuneration Committee are Edward Ho by their respective Terms of Reference. Sing-tin (chairman),T. Brian Stevenson and Frederick Ma Si-hang. Audit Committee The Remuneration Committee makes recommendation to the The Audit Committee consists of three non-executive Directors, Board on executive Directors’remuneration packages and terms two of whom are independent non-executive Directors. The of employment. The Committee also determines relevant members of the Committee are T. Brian Stevenson (chairman), remuneration policy for executive Directors and their Professor Cheung Yau-kai and the Commissioner for Transport participation in incentive schemes operated by the Company. (Robert Charles Law Footman). The Finance Director, the Head of In 2004, the Remuneration Committee held two meetings. The Internal Audit Department and representatives of the external attendance record of each Remuneration Committee member is auditors of the Company are expected to attend meetings of the set out below: Committee. At the discretion of the Committee, others may also Attendance of be invited to attend meetings. The Committee normally meets Remuneration four times a year, and the external auditors or the Finance Committee Attendance Director may request a meeting if they consider it necessary. Directors meetings in 2004 rate

The duties of the Audit Committee include financial and Edward Ho Sing-tin (chairman) 2/2 100% efficiency aspects. Amongst other things, the Committee reviews T. Brian Stevenson 1/2 50% the truth and fairness of the Group’s annual and interim financial Frederick Ma Si-hang 2/2 100% MTR CORPORATION LIMITED ANNUAL REPORT 2004 61

Nominations Committee Model Code for Securities Transactions by Directors The Nominations Committee consists of three non-executive of Listed Issuers (the “Model Code”) Directors, two of whom are independent non-executive Directors. The Company, having made specific enquiry, confirms that The members of the Nominations Committee are David Gordon members of the Board and the Executive Directorate complied Eldon (chairman), Lo Chung-hing and the Secretary for the throughout the year with the Model Code set out in Appendix 10 Environment,Transport and Works (Dr. Sarah Liao Sau-tung). to the Listing Rules. Senior managers who, because of their office The Nominations Committee nominates and recommends to in the Company, are likely to be in possession of unpublished the Board candidates for filling vacancies on the Board. The price sensitive information, have been requested to comply with Committee held no meeting in 2004. the provisions of the Model Code. Independent Committee The Board is committed to looking after the interests of Business Ethics independent shareholders of the Company, and for this purpose, The Company is committed to a high standard of business ethics an independent committee of the Board (the “Independent and integrity. Committee”), chaired by Edward Ho Sing-tin, together with The 2002 Code of Conduct on the ethical and behavioural Professor Cheung Yau-kai, Christine Fang Meng-sang, Lo Chung- framework for all staff was reviewed and reissued to all staff in hing and T. Brian Stevenson, has been established to consider and June 2004 to align it with the latest developments in corporate review terms of any possible merger between the Company and governance standards, including corporate governance KCRC, and advise independent shareholders whether they are fair standards under the Sarbanes-Oxley Act of 2002. A new and reasonable. All members of the Independent Committee are “Corporate Guidebook for All Staff on Code of Conduct” independent non-executive Directors of the Company. was issued to all staff at the same time. The Guidebook provides specific guidelines for employees in respect of behaviour within Internal Audit and outside the workplace. Communication sessions were held The Internal Audit Department plays a major role in support of to brief employees on the changes in the Code of Conduct and and in collaboration with the Company’s management, in the contents of the new Corporate Guidebook. monitoring the internal governance of the Company. The Department has unrestricted access to information that allows it US Sarbanes-Oxley Act 2002 to review all aspects of the Company’s network of risk This legislation, which seeks to enhance the transparency management, control and governance processes. On a regular and accountability of companies in the areas of corporate basis, it conducts audits of the practices, procedures, expenditure governance and financial reporting, was signed into law by and internal controls of all business and support units and the President of the United States on 30 July 2002. subsidiaries. As the need arises, it also conducts ad-hoc reviews or investigations. The Internal Auditor reports directly to the Chief As the Company is a SEC reporting company, it is generally Executive Officer and has direct access to the Audit Committee. bound by this legislation. The Company has been, and will continue its process of, Code of Best Practice reviewing its internal systems and practices and implementing The Company has complied throughout the year with the Code new requirements under this legislation in line with applicable of Best Practice set out in Appendix 14 to the Listing Rules except compliance dates. that non-executive Directors of the Company are not appointed for a specific term but are subject (save for those appointed pursuant to Section 8 of the MTR Ordinance) to retirement by rotation and re-election at the Company’s annual general meetings in accordance with Articles 87 and 88 of the Articles of Association. Dr. Raymond Ch’ien Kuo-fung, a member of the Board, was appointed as the non-executive Chairman of the Company with effect from 21 July 2003 for a term of three years. 62 Board and Executive Directorate

Dr. Raymond Ch’ien Kuo-fung Chow Chung-kong Professor Cheung Yau-kai David Gordon Eldon Christine Fang Meng-sang

Edward Ho Sing-tin Lo Chung-hing T. Brian Stevenson Commissioner for Transport Secretary for the Environment, Frederick Ma Si-hang (Robert Charles Law Footman) Transport and Works (Dr. Sarah Liao Sau-tung)

Members of the Board Chow Chung-kong 54, was appointed contribution to industry. He is currently Chief Executive Officer on 1 December member of the Council of the Hong Kong Dr. Raymond Ch’ien Kuo-fung 53, was 2003. He was formerly chief executive Institute of Certified Public Accountants, appointed Non-Executive Chairman in officer of Brambles Industries PLC. the Hong Kong Tourism Board and the July 2003. He has been a member of the From 1997 to 2001, Mr. Chow was chief Council of The Chinese University of Hong Board since 1998. Dr. Ch’ien is executive executive of GKN PLC and before that, he Kong. Mr. Chow is also a non-executive chairman of chinadotcom corporation spent 20 years with the BOC Group PLC director of Standard Chartered PLC and and non-executive chairman of HSBC and was appointed a director of its board the non-executive chairman of Standard Private Equity (Asia) Limited. He serves and chief executive of its Gases Division Chartered Bank (Hong Kong) Limited. on the boards of HSBC Holdings plc, in 1993. He is a chartered engineer with The Hongkong and Shanghai Banking B.S. and M.S. degrees in Chemical Professor Cheung Yau-kai 70, is an Corporation Limited and Inchcape plc. Engineering from The University of independent non-executive Director Dr. Ch’ien is chairman of the Advisory Wisconsin and The University of California and has been a member of the Board Committee on Corruption of the respectively. He holds a master of since 1999. Professor Cheung is Honorary Independent Commission Against business administration degree from The Professor of Engineering and Special Corruption; chairman of the Hong Kong/ Chinese University of Hong Kong and was Adviser to the Vice-Chancellor of The European Union Business Cooperation a graduate of the Advanced Management University of Hong Kong. He has been Committee (with effect from 1 February Program of Harvard Business School. awarded several honorary degrees 2005) and a Hong Kong member of the He was awarded an Honorary Doctor of including, an honorary Doctor of Science APEC Business Advisory Council. Engineering degree by The University of by The University of Hong Kong and an Dr. Ch’ien received a doctoral degree in Bath. Mr. Chow was knighted in the honorary Doctor of Laws by the economics from the University of United Kingdom in 2000 for his University of Wales. Pennsylvania in 1978. MTR CORPORATION LIMITED ANNUAL REPORT 2004 63

David Gordon Eldon 59, is an Lo Chung-hing 53, is an independent Secretary for the Environment, independent non-executive Director non-executive Director and has been a Transport and Works (Dr. Sarah Liao and has been a member of the Board member of the Board since 1995. Mr. Lo Sau-tung 53, joined the Board as a since 1999. He is the chairman of The is currently general manager of Bank non-executive Director appointed as an Hongkong and Shanghai Banking of China (Hong Kong) Ltd, after the “additional director”under section 8 of Corporation Limited and a director of restructuring of the Bank of China Group the MTR Ordinance in August 2002 after HSBC Holdings plc, the non-executive in October 2001. He is also a board her appointment as the Secretary for chairman of Hang Seng Bank Limited, a member of the Hospital Authority and a the Environment,Transport and Works director of HSBC Bank Australia Limited director of the Urban Renewal Authority. of the Government of the Hong Kong and a director of Swire Pacific Limited. In SAR on 1 July 2002. As Secretary for the addition, Mr. Eldon is also a Steward of T. Brian Stevenson 60, is an Environment,Transport and Works, she is the Hong Kong Jockey Club. independent non-executive Director also a director of a number of companies and has been a member of the Board including Kowloon-Canton Railway Christine Fang Meng-sang 46, was since October 2002. He is a non-executive Corporation, and Route 3 (CPS) Company appointed independent non-executive director of The Hongkong and Shanghai Limited. Dr. Liao obtained a Doctorate Director on 1 January 2004. Ms. Fang has Banking Corporation Limited and Degree (Environmental/Occupational been the chief executive of the Hong is a member of the Public Service Health) from The University of Hong Kong Council of Social Service since 2001. Commission and a Steward of the Kong. She has also been a fellow of the She sits on various government advisory Hong Kong Jockey Club. He is a chartered Royal Society of Chemistry since 1995 committees, including the Social Welfare accountant and holds law degrees from and of the Hong Kong Institution of Advisory Committee, the Rehabilitation Glasgow and Hong Kong Universities. Engineers since 1996.) Advisory Committee, the Community Investment & Inclusion Fund Committee, Commissioner for Transport (Robert Frederick Ma Si-hang 53, joined the the Hong Kong Housing Authority, the Charles Law Footman 52, joined the Board as a non-executive Director on Sustainable Development Council, and Board as a non-executive Director 1 July 2002 upon his appointment as the Advisory Council on AIDS. appointed as an “additional director” Secretary for Financial Services and the under section 8 of the MTR Ordinance in Treasury of the Government of the Hong Edward Ho Sing-tin 66, is an June 2000. He is the Commissioner for Kong SAR. Besides serving as board independent non-executive Director Transport of the Government of the member of Kowloon-Canton Railway and has been a member of the Board Hong Kong SAR. Mr. Footman had Corporation and Airport Authority, since 1991. He is an architect and is previously served as Postmaster General, Mr. Ma is also a director of Hong Kong deputy chairman and managing director Head of the Efficiency Unit and Deputy International Theme Parks Limited, Hong of Wong Tung & Partners Limited. Mr. Ho Director-General of Trade of the Hong Kong Mortgage Corporation Limited, is also a board member of the Hospital Kong Government. As Commissioner for Mandatory Provident Fund Schemes Authority. Transport, Mr. Footman is also a director Authority and Hong Kong Institute for of several transport-related companies, Monetary Research. Graduated from including The Kowloon Motor Bus The University of Hong Kong in 1973, Holdings Ltd., Long Win Bus Co. Ltd., Mr. Ma holds a Bachelor of Arts degree, New World First Bus Services Limited, majoring in economics and history. New Lantao Bus Company Limited, Citybus Limited,The Star Ferry Company Limited,The New Hong Kong Tunnel Company Limited,Western Harbour Tunnel Company Limited,Tate’s Cairn Tunnel Company Limited and Route 3 (CPS) Company Limited.) 64 Board and Executive Directorate

Members of the Executive William Chan Fu-keung 56, has been Lincoln Leong Kwok-kuen 44, has Directorate the Human Resources Director since August served as the Finance Director since 1998. Mr. Chan joined the Company as February 2002. Mr. Leong graduated Chow Chung-kong Brief biographical Human Resources Manager in 1989. He from Cambridge University and is a details are set out on page 62. graduated from The University of Hong chartered accountant. Prior to joining the Kong in 1971, majoring in economics. Company as Finance Director, he worked Russell John Black 58, has been in both the accountancy and investment appointed the Project Director of the Philip Gaffney 57, was appointed banking industries. Company since 1992. He initially worked Managing Director of Operations and for the Company from 1976 to 1984 and, Mr. Leong is also a non-executive director Business Development in March 2004. prior to rejoining the Company in 1992, of both Hong Kong Aircraft Engineering He joined the Company in 1977 and was he was project director on the London Company Limited (HAECO) and Tai Ping previously Operations Director. Mr. Gaffney Underground Jubilee Line Extension. Carpets International Limited. is a railway signalling engineer. Mr. Black holds an honours degree in civil engineering from the University of Leonard Bryan Turk 55, is a solicitor Thomas Ho Hang-kwong 54, has served Canterbury in New Zealand. He is a Fellow admitted to practice both in England and as Property Director since joining the of the Hong Kong Academy of Engineering Wales and in Hong Kong. He joined the Company in 1991. Between 1971 and 1990, Sciences, the Hong Kong Institution of Company in 1981 and has been Legal he worked for the Hong Kong Government Engineers and the Institution of Professional Director and Secretary to the Board specialising in land administration. Mr. Ho is Engineers New Zealand. since 1988. a chartered surveyor.

From left to right: William Chan Fu-keung,Thomas Ho Hang-kwong, Philip Gaffney, Chow Chung-kong, Russell John Black, Leonard Bryan Turk, Lincoln Leong Kwok-kuen. MTR CORPORATION LIMITED ANNUAL REPORT 2004 65 Key corporate management

> Chow Chung-kong > Roderic Hockin > David Avery Chief Executive Officer Project Manager - LAR General Manager - Procurement & Contracts

Operations > Antonio Choi Fung-chung > Teresa Cheung Chi-ying > Phil Gaffney Chief Project Manager - Shenzhen L4 Legal Manager General Managing Director - Operations & Business > Ringo Lo Tze-shut > Lila Fong Man-lee Development Corporate Efficiency Manager Legal Manager - Secretarial > Andrew McCusker > Glenn Frommer >Martin Dunn Deputy Operations Director Sustainability Development Manager Procurement & Contracts Manager - Operations > Adi Lau Tin-shing > Ian J Browning > Paul Thomson General Manager - Special Duties Contracts Manager - Europe Senior Legal Adviser

> Wilfred Lau Cheuk-man Property > David Tang Chi-fai Head of Operations > Thomas Ho Hang-kwong Contracts & Commercial Manager - China Business > George Lee Kai-wing Property Director Human Resources & Administration Traffic Operations Manager > Victor Chan Hin-fu > William Chan Fu-keung > Tony Yeung Sau-on General Manager - Property Development Human Resources Director Operations Manager - KTL/TKL > Terence Chan Pak-hang > Vincent Luk Kin-ping > Jacob Kam Chak-pui General Manager - Property Project Human Resources Manager Operations Manager - LAR > Gary Lau Wai-keung > Francis Mok Gar-lon > Franco Fabbian Chief Estate Manager Management Training & Development Manager Operations Engineering Services Manager > Stella Kwan Mun-yee > Steven Cho Yan-ming > Morris Cheung Siu-wa Chief Estate Manager Training Manager - Operations Rolling Stock Manager >Steve Yiu Chin > Lok Ka-sui > Leung Kwok-yiu Chief Manager - Town Planning Administration & Security Manager Safety & Quality Manager Finance Marketing > Jonathan Dring > Lincoln Leong Kwok-kuen > Jeny Yeung Mei-chun General Manager - International Business Finance Director General Manager - Marketing and Station > Richard Wong Shiu-ki > Jimmy Lau Chiu-chung Business General Manager - China Business General Manager - Financial Control & Treasury Corporate Relations > David Leung Chuen-choi > Herbert Hui Leung-wah > Miranda Leung Chan Che-ming Acting Infrastructure Manager General Manager - Corporate Finance General Manager - Corporate Relations > Ho Chun-wing > Daniel Lai Sik-cheung Internal Audit Planning & Development Manager Head of Information Technology > Eric Tang Koon-hung > Eddie So Chung-tat > Sunny Lui Siu-sun Head of Internal Audit Transport Planning Manager Assistant Financial Controller Octopus Cards Limited Project > Edwin Kwan Pit-ming >Eric Tai Yung-muk > Russell Black Assistant Financial Controller Chief Executive Officer Project Director > Jeff Kwan Wai-hung TraxComm Limited > Henry Lam Hing-cheung Deputy Treasurer > Paul Ho Nai-man General Manager - Project > Denise Ng Kee Wing-man Chief Executive Officer > Paul Lo Po-hing Corporate Finance Manager Chief Project Manager - Shanghai > Leung Chi-choi Rail Sourcing Solutions > Malcolm Gibson Stores Manager (International) Limited Chief Design Manager > David Avery Legal & Procurement >David Sorton Acting Chief Executive Officer >Leonard Turk Project Manager - Operations & General Legal Director & Secretary 66 Report of the Members of the Board

The members of the Board have pleasure in submitting their Dividend Report and the audited statement of Accounts for the financial The Directors have recommended a final dividend of HK$0.28 year ended 31 December 2004. per Ordinary Share to be payable to shareholders whose names appear on the Register of Members of the Company on 1 April Principal Activities of the Group 2005. Subject to the passing of the necessary resolution at the The principal activities of the Company and its subsidiaries are: forthcoming Annual General Meeting, such dividend will be A the operation of a mass transit railway system with lines from payable on or about 21 June 2005, in cash in Hong Kong dollars, Central to Tsuen Wan (Tsuen Wan Line), from Yau Ma Tei to Tiu with a scrip dividend alternative. The Company’s majority Keng Leng (Kwun Tong Line), from Po Lam to North Point shareholder,The Financial Secretary Incorporated, has agreed to (Tseung Kwan O Line), from Chai Wan to Sheung Wan (Island elect to receive all or part of its entitlement to dividends in the Line), from Hong Kong to Tung Chung (Tung Chung Line) and form of scrip to the extent necessary to ensure that a maximum from Hong Kong to the Hong Kong International Airport at of 50% of the total dividend paid by the Company will be in the Chek Lap Kok (Airport Express Line); form of cash. B property development at locations relating to the railway Members of the Board system including the Tseung Kwan O Extension; Members of the Board who served during the year were C related commercial activities, including the letting of Raymond Ch’ien Kuo-fung (non-executive Chairman), advertising and retail space, bandwidth services on the railway Chow Chung-kong (Chief Executive Officer), Cheung Yau-kai, telecommunication system, property management and leasing David Gordon Eldon, Christine Fang Meng-sang (appointed management of investment properties (including shopping on 1 January 2004), Edward Ho Sing-tin, Lo Chung-hing, centres and offices), property agency and Octopus Card Building T. Brian Stevenson, Frederick Ma Si-hang, the Secretary for the Access System services; Environment,Transport and Works (Sarah Liao Sau-tung) and the Commissioner for Transport (Robert Charles Law Footman). D the construction of Disneyland Resort Line (formerly known as Penny’s Bay Rail Link); At the Annual General Meeting on 3 June 2004 and pursuant to the Articles of Association, Raymond Ch’ien Kuo-fung, E the design, construction and operation of the Tung Chung Chow Chung-kong, David Gordon Eldon and Christine Fang Cable Car Project and related tourist development; Meng-sang retired under the Articles of Association and were F the planning and construction of future extensions to the re-elected as members of the Board. railway system and other related infrastructure projects; At the forthcoming Annual General Meeting and in accordance G consultancy services covering all areas of expertise required with the Articles of Association, Cheung Yau-kai, Edward Ho in the project management, planning, construction, operation, Sing-tin and Lo Chung-hing will retire by rotation. All these three maintenance and up-grading of railways plus fare collection, Board members will offer themselves for re-election at the property integration/development advice including other forthcoming Annual General Meeting. property related services and advice on generation of Brief biographical details for Board members are set out on non-fare revenues; pages 62 and 63. H the operation of a smart card system by Octopus Cards Limited, a subsidiary of the Company, for the collection of payments for both transport and non-transport applications; and I equity investments and long term operation and maintenance contracts outside of Hong Kong. MTR CORPORATION LIMITED ANNUAL REPORT 2004 67

Alternate Directors Internal Audit The Alternate Directors in office during the year were (i) Martin The Company’s Internal Audit Department provides independent, McKenzie Glass and Alan Lai Nin (both for Frederick Ma Si-hang), objective assurance and consulting services designed to add (ii) both the Permanent Secretary for the Environment,Transport value and improve the Company’s operations. Key responsibilities & Works (Rita Lau Ng Wai-lan [who ceased to be the Permanent of the Department include:

Secretary for the Environment,Transport & Works with effect from > Assessments on the adequacy and effectiveness of the 2 January 2004], Margaret Fong Shun-man [with effect from Company’s system of internal control for controlling its activities 1 July 2004 and ceased to be the Permanent Secretary for the and managing its risks. Environment,Transport & Works with effect from 15 August 2004] > Identification of opportunities for improving management and Joshua Law Chi-kong [with effect from 23 August 2004]) and control, resources utilisation and profitability. the Deputy Secretary for the Environment,Transport & Works > Special reviews and/or investigations as commissioned by (Arthur Ho Kin-wah [who ceased to be a Deputy Secretary for the Company management. Environment,Transport & Works with effect from 15 November The Company’s Internal Auditor reports directly to the Chief 2004], Margaret Fong Shun-man [who ceased to be a Deputy Executive Officer and has direct access to the Audit Committee. Secretary for the Environment,Transport & Works with effect from 1 July 2004], Patrick Ho Chung-kei [with effect from 1 July 2004], Business Ethics Thomas Chow Tat-ming [with effect from 1 July 2004], Cathy Chu Please refer to page 61. Man-ling [with effect from 15 November 2004] and Annie Choi Suk-han) (for the Secretary for the Environment,Transport & Policies Works), and (iii) the Deputy Commissioner for Transport/ The Board has adopted risk management strategies on the Transport Services and Management (Judy Li Wu Wai-lok) (for following matters: the Commissioner for Transport). A Construction and insurance; B Finance; Executive Directorate C Treasury risk management; The members of the Executive Directorate who served during D Safety risk management; the year were Chow Chung-kong (Chief Executive Officer and a E Security management. member of the Board), Russell John Black,William Chan Fu-keung, Philip Gaffney,Thomas Ho Hang-kwong, Lincoln Leong Kwok- No changes to such policies may be made without the approval kuen and Leonard Bryan Turk. of the Board.

Brief biographical details for members of the Executive Bank Overdrafts, Bank Loans and Other Borrowings Directorate during the year are set out on page 64. The total borrowing of the Group as at 31 December 2004 amounted to HK$30,378 million (2003: HK$32,025 million). Corporate Governance Particulars of borrowings including bank overdrafts and bank The Company has complied throughout the year ended 31 loans are set out in note 27 to the accounts. December 2004 with the Code of Best Practice set out in Appendix 14 to the Listing Rules, except that non-executive Accounts Directors of the Company are not appointed for a specific term The state of affairs of the Company and the Group as at 31 but are subject (save for those appointed pursuant to Section 8 December 2004 and of the Group’s results, changes in equity of the MTR Ordinance) to retirement by rotation and re-election and cash flows for the year are set out in the accounts on pages at the Company’s annual general meetings in accordance with 75 to 135. Articles 87 and 88 of the Articles of Association. Raymond Ch’ien Kuo-fung has been a non-executive Director since 1998. He was Ten-Year Statistics also appointed non-executive Chairman in July 2003 for a term A summary of the results and of the assets and liabilities of the of three years. Details for corporate governance are set out on Group together with some major operational statistics for the last pages 59 to 61. ten years are set out on pages 54 to 55. 68 Report of the Members of the Board

Fixed Assets and Railway Construction in Progress Donations Movements in fixed assets and railway construction in progress During the year, the Company donated a total of HK$581,724 to during the year are set out in notes 14 and 15 to the accounts charitable organisations, out of which HK$381,724 went to the respectively. Community Chest of Hong Kong for the Community Chest Green Day. The remaining HK$200,000 raised from the launching Movements in Reserves ceremony of the Doraemon MTR Souvenir Ticket went to the Movements in reserves during the year are set out in notes 35 Kelly Chen Children Education Fund Limited. and 36 to the accounts. Internal Control Share Capital The Board is responsible for ensuring that there is in place a As at 31 December 2003, the authorised share capital of the satisfactory system of internal control. The main objectives are to Company was HK$6.5 billion, divided into 6.5 billion Ordinary ensure adherence to management policies, the safeguarding of Shares, 5,288,695,393 of which were issued and credited as fully assets, the efficiency and effectiveness of operation, the paid. During the year, the Company issued a total of 101,304,581 prevention and detection of fraud and error, the accuracy and Ordinary Shares. Of this number: completeness of the accounting records, and the timely A 8,023,500 Ordinary Shares were issued by the Company preparation of reliable financial information. pursuant to the exercise of share options which had been A function of the Audit Committee is to review the effectiveness granted under the Company’s Pre-Global Offering Share Option of the system of internal control from information provided by Scheme (as referred in note 43A to the accounts). In respect of the Executive Directorate and management of the Company and each Ordinary Share issued, the relevant exercising share option by the auditors. holder paid HK$8.44 to the Company; Reporting and Monitoring B 62,069,342 Ordinary Shares were issued by the Company in There is a comprehensive budgeting system for all operational order to satisfy shareholders’scrip dividend elections in respect and business activities, with an annual budget approved by the of the final dividend of the Company for the year ended 31 Board. Monthly results of the Company’s operations, businesses December 2003 (for which the cash dividend was HK$0.28 per and projects are reported against the budget to the Board and Ordinary Share); and updated forecasts for the year are prepared regularly. C 31,211,739 Ordinary Shares were issued by the Company in order to satisfy shareholders’scrip dividend elections in respect Treasury Management of the interim dividend of the Company for the six months The Company’s Treasury Department operates within approved ended 30 June 2004 (for which the cash dividend was HK$0.14 guidelines from the Board. It manages the Company’s debt per Ordinary Share). profile with reference to the Preferred Financing Model which defines the preferred mix of financing instruments, fixed and As at 31 December 2004, the authorised share capital of floating rate debts, maturities, interest rate risks, currency the Company was HK$6.5 billion, divided into 6.5 billion exposure and financing horizon. The model is reviewed and Ordinary Shares, 5,389,999,974 of which were issued and refined periodically to reflect changes in the Company’s credited as fully paid. financing requirements and market environment. Derivative Redemption of Listed Securities financial instruments such as interest rate swaps and cross Neither the Company nor any of its subsidiaries purchased, currency swaps are used only as hedging tools to manage the sold or redeemed any of its listed securities during the financial Group’s interest rate and currency risks. Prudent guidelines and year 2004. procedures are in place to control the Company’s derivatives activities, including a comprehensive credit risk management Properties system for monitoring counterparty credit exposure using the Particulars of the principal investment properties and properties Value-at-Risk approach. There is also appropriate segregation of held for sale of the Company are shown on page 39. duties within the Company’s Treasury Department. Major financing transactions and guidelines for derivatives transactions including credit risk management framework are approved at the Board level. MTR CORPORATION LIMITED ANNUAL REPORT 2004 69

Capital and Revenue Expenditure support has been certified under ISO 9001:2000. Disaster There are defined procedures for the appraisal, review and recovery rehearsal on critical applications is conducted annually. approval of major capital and revenue expenditures. All project Interests in Contracts of Members of the Board and expenditure over 0.2% of the net assets of the Company and the the Executive Directorate employment of consultancy services over 0.1% of the net assets There was no contract of significance, to which the Company or of the Company require the approval of the Board. any of its subsidiaries was a party and in which a member of the Bonds and Notes Issued Board or a member of the Executive Directorate had a material interest (whether direct or indirect), which subsisted at the end The Group issued bonds and notes during the year ended 31 of the year or at any time during the year. December 2004, details of which are set out in note 27D to the accounts. Such bonds and notes were issued in order to meet Board Members’ and Executive Directorate’s the Group’s general corporate funding requirements, including Interests in Shares the financing of new capital expenditure and the refinancing of As at 31 December 2004, the interests or short positions of the maturing debts. members of the Board and the Executive Directorate in the Computer Processing shares, underlying shares and debentures of the Company (within the meaning of Part XV of the Securities and Futures There are defined procedures and regular quality reviews on the Ordinance (“SFO”)) as recorded in the register required to be kept operation of computer systems to ensure the accuracy and under section 352 of the SFO or as otherwise notified to the completeness of financial records and efficiency of data Company and the HKSE pursuant to the Model Code for processing. The Company’s computer centre operation and Securities Transactions by the Directors of Listed Issuers were as follows:

Long Positions in Shares and Underlying Shares of the Company Number of Ordinary Shares held Derivatives Share Options Other Percentage of Member of the Board or Personal* Family† Corporate Personal* Personal* Total aggregate interests to Executive Directorate interests interests interests interests interests interests total issued share capital

Chow Chung-kong – – – – 700,000 700,000 0.01299 (Note 1) T. Brian Stevenson 4,443 – – – – 4,443 0.00008 Christine Fang Meng-sang 1,675 – – – – 1,675 0.00003 Philip Gaffney 46,553 614 – 416,000 – 463,167 0.00859 (Note 2) Russell John Black 51,132 – – – – 51,132 0.00095 William Chan Fu-keung 46,233 – – 317,500 – 363,733 0.00675 (Note 2) Thomas Ho Hang-kwong 51,075 2,524 – 321,000 – 374,599 0.00695 (Note 2) Lincoln Leong Kwok-kuen - - 23,000 1,066,000 – 1,089,000 0.02020 (Note 3) (Note 4)

Notes 1. Chow Chung-kong has a derivative interest in respect of 700,000 shares in the Company within the meaning of Part XV of the SFO. That derivative interest represents Mr. Chow’s entitlement to receive 700,000 shares in the Company (or their equivalent value in cash) on completion of his three-year contract (on 30 November 2006).

2. Further details of the above share options are set out in the table below showing details of the options to subscribe for ordinary shares granted under the Pre-Global Offering Share Option Scheme.

3. The 23,000 shares are held by Linsan Investment Ltd., a private limited company beneficially wholly owned by Lincoln Leong Kwok-kuen.

4. Further details of the above share options are set out in the table below showing details of the options to subscribe for ordinary shares granted under the New Joiners Share Option Scheme. 70 Report of the Members of the Board

Notes of MTR Corporation (C.I.) Limited

Member of the Executive Directorate Personal interests*

William Chan Fu-keung HK$50,000 MTR 301 4.50% Notes due 2005

* Interests as beneficial owner † Interests of spouse or child under 18 as beneficial owner

Options to subscribe for Ordinary Shares granted under the Pre-Global Offering Share Option Scheme, as referred to in Notes 5B (i) and 43A to the Accounts

Weighted average closing price of Options Price per shares immediately Period during outstanding Options Options Options share paid Options before the date(s) No. of which rights as at vested lapsed exercised on exercise outstanding as on which options Executive Directorate Date options exercisable 1 January during during during of options at 31 December were exercised and eligible employees granted granted (day/month/year) 2004 the year the year the year (HK$) 2004 (HK$)

Philip Gaffney 20/9/2000 1,066,000 5/4/2001 – 11/9/2010 1,022,000 – – 606,000 8.44 416,000 11.80 William Chan Fu-keung 20/9/2000 1,066,000 5/4/2001 – 11/9/2010 822,000 – – 504,500 8.44 317,500 12.14 Thomas Ho Hang-kwong 20/9/2000 1,066,000 5/4/2001 – 11/9/2010 621,000 – – 300,000 8.44 321,000 12.25 Other eligible employees 20/9/2000 40,343,000 5/4/2001 – 11/9/2010 22,764,500 – – 6,613,000 8.44 16,151,500 12.00

Notes 1. The Pre-Global Offering Share Option Scheme (“Pre-IPO Option Scheme”) shall be valid and effective for a period of ten years after the adoption of the Pre-IPO Option Scheme on 12 September 2000. No option may be offered to be granted on or after the commencement of dealings in shares of the Company on HKSE on 5 October 2000.

2. The number of shares to which the option granted to each participant under the Pre-IPO Option Scheme does not exceed 25% of the number of the shares issued and issuable under the Pre-IPO Option Scheme.

Options to subscribe for Ordinary Shares granted under the New Joiners Share Option Scheme, as referred to in Notes 5B (ii) and 43B to the Accounts

Lincoln Leong Kwok-kuen 1/8/2003 1,066,000 14/7/2004 – 14/7/2013 1,066,000 355,500 – – – 1,066,000 – Other eligible employees 1/8/2003 495,200 14/7/2004 – 14/7/2013 495,200 165,500 – – – 495,200 –

Notes 1. No option may be exercised later than ten years after its date of offer and no option may be offered to be granted more than five years after the adoption of the New Joiners Share Option Scheme (“New Option Scheme”) on 16 May 2002.

2.Unless approved by shareholders in the manner as required by the Listing Rules, the total number of shares issued and issuable upon exercise of the options granted to any eligible employee under the New Option Scheme together with the total number of shares issued and issuable upon the exercise of any option granted to such eligible employee under any other share option scheme of the Company (including, in each case, both exercised and outstanding options) in any 12-month period must not exceed 1% of the shares of the Company in issue at the date of offer in respect of such option under the New Option Scheme. MTR CORPORATION LIMITED ANNUAL REPORT 2004 71

Save as disclosed above: facilities of HK$11,590 million, which were subject to the Government, being the Company’s controlling shareholder, A none of the members of the Board or Executive Directorate owning more than half in nominal value of the voting share of the Company had any interest or short position in the shares, capital of the Company during the lives of the borrowings and underlying shares or debentures of the Company or any of its the undrawn facilities. Otherwise, immediate repayment of associated corporations (within the meaning of Part XV of the borrowings may be demanded and cancellation of undrawn SFO); and facilities may result. B during the year ended 31 December 2004, no member of the Board or Executive Directorate nor any of their spouses or Major Suppliers and Customers children under 18 years of age held any rights to subscribe for Less than 30% in value of supplies (which were not of a capital equity or debt securities of the Company nor had there been nature) purchased during the year ended 31 December 2004 any exercises of any such rights by any of them, was attributable to the Company’s five largest suppliers. Less as recorded in the register kept by the Company under section than 30% in value of the Company’s turnover during the year 352 of the SFO or otherwise notified to the Company and the ended 31 December 2004 was attributable to the Company’s HKSE pursuant to the Model Code for Securities Transactions by five largest customers combined by value. Directors of Listed Issuers. Going Concern Directors’ Service Contracts The accounts on pages 75 to 135 have been prepared on a No director proposed for re-election at the forthcoming going concern basis. The Board has reviewed the Company’s Annual General Meeting has a service contract which is not budget for 2005, together with the longer-term forecast for the determinable by the Company or any of its subsidiaries within following five years and is satisfied that the Company has one year without payment of compensation, other than sufficient resources to continue as a going concern for the statutory compensation. foreseeable future.

Substantial Shareholders’ Interests Connected Transactions Set out below is the name of the party which was interested in During the year under review the following transactions and 5% or more of the nominal value of the share capital of the arrangements described below have been entered into (or were Company and the respective relevant numbers of shares in ongoing) with persons who are “connected persons”for the which it was interested as at 31 December 2004 as recorded in purposes of the Listing Rules: the register kept by the Company under section 336 of the SFO: Land Agreements Percentage of No. of Ordinary Shares to A The Company has entered into the following land grant with Ordinary total issued Government in relation to the Airport Railway, which provides for Name Shares share capital the Company to develop certain sites adjacent to the Airport The Financial Secretary Incorporated 4,121,262,921 76.46 Express and Tung Chung Lines. Upon payment of the relevant (in trust on behalf of the Government) land premium, the Company may develop the relevant site within the building covenant period. The agreement provides The Company has been informed by the Government that, as at for the site (once developed) to have a lease term up to 31 December 2004, approximately 1.37% of the shares of the 30 June 2047. Company were held for the account of the Exchange Fund. New Grant No. 8102 for Private Treaty Grant, dated 26 June 1997, The Exchange Fund is a fund established under the Exchange of Tung Chung Town Lot No. 5 for development at Tung Chung Fund Ordinance (Cap. 66 of the laws of Hong Kong) under the Station (building covenant period expiry date 30 June 2003) with control of the Financial Secretary. a total consideration or value of HK$4,150,000,000. The building covenant period was extended to 30 September 2004 by a letter Loan Agreements with Covenant Relating to Specific dated 9 June 2004 from Government with a total consideration Performance of the Controlling Shareholder or value of HK$15,936,000. By a letter dated 14 July 2004, As at 31 December 2004, the Group had borrowings of Government excluded balconies and utility platforms from the HK$29,974 million with maturities ranging 2005 to 2019 and calculation of gross floor area of the development with a total undrawn committed and uncommitted banking and other consideration or value of HK$30,561,000. 72 Report of the Members of the Board

B The Company has entered into a land grant relating to NKIL D In respect of the Remaining Portion of Mass Transit Railway No. 6179 for development rights near Choi Hung Station in order Lot No. 1: for the Company to develop the lot in accordance with the terms A Supplemental Lease was signed on 11 February 2002 between and conditions stipulated in the Conditions of Grant No. 12611 Government and the Company in which the Government leased dated 12 November 2001 (building covenant period expiry date to the Company land occupied by the Quarry Bay Congestion 30 June 2006), with a total value of HK$207,000,000 and a lease Relief Works or the Quarry Bay Relief Works connecting Quarry term of 50 years from date of grant. The Company has entered Bay Station to North Point Station at an annual rent of 3% of the into a Modification Letter dated 26 June 2004 with Government rateable value of the leased area for a term commencing for additional gross floor area and other amendments in respect 1 October 2001 to 29 June 2050 on terms and conditions of the development with a total consideration or value of substantially similar to the lease for the Mass Transit Railway Lot HK$95,190,000. No. 1. By a Modification Letter dated 13 May 2002 entered into C The Company has entered into the following land grants between Government and the Company, the lease for the with Government in relation to the Tseung Kwan O Line, which Remaining Portion of Mass Transit Railway Lot No. 1 was provides for the Company to develop certain sites above or modified in areas indicated in the lease plans attached to the adjacent to the Tseung Kwan O Line. Upon payment of the Modification Letter at an administration fee of HK$16,200. relevant land premium, the Company may develop the relevant By a Modification Letter executed by the Government and the site within the building covenant period. All land grants provide Company dated 31 May 2004, the lease for the Remaining for the sites to have a lease term of 50 years from the date of the Portion of Mass Transit Railway Lot No.1 was modified in areas land grant. indicated in the lease plans attached to the Modification Letter in the consideration of a premium of HK$1,000 and an (1) New Grant No. 9687 for Private Treaty Grant, dated 28 March administrative fee of HK$16,200. 2002, of TKOTL No. 75 for development at Area 55b Tseung Kwan O (building covenant period expiry date 31 March 2007) with a Project Agreement total consideration or value of HK$600,000,000 subject to a Deed On 17 March 2004, the Company entered into an agreement of Surrender dated 28 December 2002 for surrender of a stratum with Hong Kong IEC Limited for the design, construction, of the lot. By a letter dated 30 June 2004, Government excluded financing and operation of a new Airport Express Line station balconies and utility platforms from the calculation of gross floor to serve the new International Exhibition Centre, known as area of the development at Tseung Kwan O Town Lot No. 75 with AsiaWorld-Expo, which is being built at Chek Lap Kok. Hong Kong a total consideration or value of HK$32,560,640. IEC Limited is a joint venture company between IEC Holdings (2) New Grant No. 9700 for Private Treaty Grant of TKOTL No. 73, Limited (wholly owned by the Government and the Airport dated 11 February 2003, for development at Area 73b Tseung Authority) and IEC Investment Limited (wholly owned by Kwan O (building covenant period expiry date 31 March 2008 for Dragages et Travaux Publics (HK) Limited,Yu Ming Investments Site A and 31 March 2009 or 60 months from the due date for Limited and Yu Ming Investment Management Limited). The total payment of the land premium, whichever is the later, for Site B) capital cost of the new station is about HK$274 million. with a consideration or value of HK$1,028,000,000 for Site A. Government is a substantial shareholder in the Company. The consideration or value for Site B was assessed on 10 January 2004 at HK$1,227,840,000. By a letter dated 3 August 2004, Auditors Government excluded balconies and utility platforms from The retiring auditors, KPMG, have signified their willingness to calculation of gross floor area of the development at Site A with continue in office. A resolution will be proposed at the Annual a total consideration or value of HK$36,915,120. General Meeting to reappoint them and to authorise the Following the end of the year under review, the Company Directors to fix their remuneration. accepted on 24 January 2005 the land premium offer from Government under New Grant No. 9689 dated 16 May 2002 for By order of the Board the development rights of Site F of Tseung Kwan O Town Lot No. 70 (building covenant period expiry date: 72 months from the date of payment of Site F premium) with a total consideration or Leonard Bryan Turk value of HK$2,319,290,000. An undertaking regarding a lease Secretary to the Board modification of TKOTL No. 70 to reflect the master layout plan Hong Kong, 1 March 2005 approved on 13 August 2004 was given to Government on 24 January 2005. A Modification Letter for Site F is to be executed pursuant to the said undertaking on or before 23 April 2005. Contents of accounts and notes 74 Auditors’ report

Accounts 75 > Consolidated profit and loss account 76 > Consolidated balance sheet 77 > Balance sheet 78 > Consolidated statement of changes in equity 79 > Consolidated cash flow statement

Notes to the accounts 80 1 Principal accounting policies 90 2 Fare revenue 90 3 Non-fare revenue 91 4 Operating expenses before depreciation 92 5 Remuneration of Members of the Board and the Executive Directorate 94 6 Profit on property developments 94 7Depreciation 94 8 Interest and finance charges 95 9Income tax 95 10 Profit attributable to shareholders 96 11 Dividends 96 12 Earnings per share 97 13 Segmental information 99 14 Fixed assets 103 15 Railway construction in progress 104 16 Property development in progress 106 17 Deferred expenditure 108 18 Interest in non-controlled subsidiary 110 19 Investments in subsidiaries 112 20 Investments in held-to-maturity securities 112 21 Staff housing loans 113 22 Properties held for sale 113 23 Stores and spares 113 24 Debtors, deposits and payments in advance 114 25 Amounts due from the Government and other related parties 115 26 Cash and cash equivalents 115 27 Loans and obligations under finance leases 119 28 Off-balance sheet financial instruments 119 29 Creditors, accrued charges and provisions 120 30 Contract retentions 121 31 Amounts due to the Government and other related parties 121 32 Deferred liabilities 121 33 Deferred income 122 34 Income tax in the balance sheet 123 35 Share capital, share premium and capital reserve 124 36 Other reserves 125 37 Retirement Schemes 127 38 Defined benefit retirement plan obligations 128 39 Construction projects 129 40 Interests in jointly controlled operations 130 41 Material related party transactions 132 42 Commitments 134 43 Employee Share Option Schemes 135 44 Subsequent events 135 45 Recently issued accounting standards 135 46 Approval of accounts

136 Unaudited supplementary information for US bond holders 74 Auditors’ report

To the shareholders of MTR Corporation Limited (the “Company”) (Incorporated in Hong Kong with limited liability)

We have audited the accounts on pages 75 to 135 which have been prepared in accordance with accounting principles generally accepted in Hong Kong.

Respective responsibilities of the directors and auditors The Hong Kong Companies Ordinance requires the directors to prepare accounts which give a true and fair view. In preparing accounts which give a true and fair view, it is fundamental that appropriate accounting policies are selected and applied consistently, that judgements and estimates are made which are prudent and reasonable and that the reasons for any signiﬁcant departure from applicable accounting standards are stated.

It is our responsibility to form an independent opinion, based on our audit, on those accounts and to report our opinion solely to you, as a body, in accordance with section 141 of the Hong Kong Companies Ordinance, and for no other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of this report.

Basis of opinion We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Institute of Certiﬁed Public Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the signiﬁcant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Company’s and the Group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufﬁcient evidence to give reasonable assurance as to whether the accounts are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the accounts. We believe that our audit provides a reasonable basis for our opinion.

Opinion In our opinion, the accounts give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2004 and of the Group’s proﬁt and cash ﬂows for the year then ended and have been properly prepared in accordance with the Hong Kong Companies Ordinance.

KPMG Certiﬁed Public Accountants Hong Kong, 1 March 2005 Consolidated MTR CORPORATION LIMITED ANNUAL REPORT 2004 75 proﬁt and loss account

for the year ended 31 December in HK$ million Note 2004 2003

Fare revenue 2 5,932 5,489 Station commercial and other revenue 3A 1,311 1,117 Rental and management income 3B 1,108 988 Turnover 8,351 7,594 Staff costs and related expenses 4A (1,542) (1,643) Energy and utilities (544) (546) Operational rent and rates (70) (21) Stores and spares consumed (128) (128) Repairs and maintenance 4B (517) (477) Railway support services (72) (80) Expenses relating to station commercial and other businesses (315) (351) Property ownership and management expenses (207) (198) Project study and business development expenses 4C (167) (49) General and administration expenses 4D (167) (167) Other expenses 4D (76) (187) Operating expenses before depreciation (3,805) (3,847) Operating profit from railway and related operations before depreciation 4,546 3,747 Profit on property developments 6 4,568 5,369 Operating profit before depreciation 9,114 9,116 Depreciation 7 (2,512) (2,402) Operating profit before interest and finance charges 6,602 6,714 Interest and finance charges 8 (1,450) (1,539) Share of profit of non-controlled subsidiary 18 44 23 Profit before taxation 5,196 5,198 Income tax 9A (700) (748) Profit attributable to shareholders 10 4,496 4,450 Dividends 11 Interim dividend declared and paid during the year 750 734 Final dividend proposed after the balance sheet date 1,509 1,481 2,259 2,215 Earnings per share: 12 – Basic HK$0.84 HK$0.85 – Diluted HK$0.84 HK$0.85

The notes on pages 80 to 135 form part of these accounts. 76 Consolidated balance sheet

at 31 December in HK$ million Note 2004 2003

Assets Fixed assets 14 – Investment properties 16,687 14,169 – Other property, plant and equipment 83,626 82,752 100,313 96,921 Railway construction in progress 15 962 181 Property development in progress 16A 2,088 2,309 Deferred expenditure 17 243 104 Interest in non-controlled subsidiary 18 63 110 Deferred tax assets 34B 15 – Investments in held-to-maturity securities 20 202 – Staff housing loans 21 47 67 Properties held for sale 22 815 812 Stores and spares 23 248 249 Debtors, deposits and payments in advance 24 1,276 1,153 Amounts due from the Government and other related parties 25 133 84 Cash and cash equivalents 26 269 376 106,674 102,366 Liabilities Bank overdrafts 27B 11 12 Short-term loans 27B – 353 Creditors, accrued charges and provisions 29 3,034 3,420 Current taxation 34A 3 2 Contract retentions 30 240 311 Amounts due to the Government and other related parties 31 1 161 Loans and obligations under ﬁnance leases 27B 30,367 31,660 Deferred liabilities 32 109 86 Deferred income 33 4,638 5,061 Deferred tax liabilities 34B 4,764 4,000 43,167 45,066 Minority interests 8 8 Net assets 63,499 57,292 Shareholders’ funds Share capital, share premium and capital reserve 35 36,269 35,086 Other reserves 36 27,230 22,206 63,499 57,292

Approved and authorised for issue by the Members of the Board on 1 March 2005

Raymond K F Ch’ien C K Chow Lincoln K K Leong

The notes on pages 80 to 135 form part of these accounts. MTR CORPORATION LIMITED ANNUAL REPORT 2004 77 Balance sheet

at 31 December in HK$ million Note 2004 2003

Assets Fixed assets 14 – Investment properties 16,687 14,169 – Other property, plant and equipment 83,466 82,553 100,153 96,722 Railway construction in progress 15 962 181 Property development in progress 16A 2,088 2,309 Deferred expenditure 17 192 104 Investments in subsidiaries 19 182 178 Staff housing loans 21 47 67 Properties held for sale 22 815 812 Stores and spares 23 248 249 Debtors, deposits and payments in advance 24 1,271 1,160 Amounts due from the Government and other related parties 25 275 175 Cash and cash equivalents 26 137 175 106,370 102,132 Liabilities Bank overdrafts 27B 11 12 Short-term loans 27B – 353 Creditors, accrued charges and provisions 29 2,755 3,272 Contract retentions 30 240 311 Amounts due to the Government and other related parties 31 12,871 11,235 Loans and obligations under ﬁnance leases 27B 17,701 20,711 Deferred liabilities 32 109 86 Deferred income 33 4,638 5,061 Deferred tax liabilities 34B 4,764 4,000 43,089 45,041 Net assets 63,281 57,091 Shareholders’ funds Share capital, share premium and capital reserve 35 36,269 35,086 Other reserves 36 27,012 22,005 63,281 57,091

Approved and authorised for issue by the Members of the Board on 1 March 2005

Raymond K F Ch’ien C K Chow Lincoln K K Leong

The notes on pages 80 to 135 form part of these accounts. 78 Consolidated statement of changes in equity

for the year ended 31 December in HK$ million Note 2004 2003

Balance as at 1 January 57,292 53,574 Surplus on revaluation of investment properties 36 2,486 276 Surplus/(Deficit) on revaluation of self-occupied office land and buildings, net of deferred tax 36 273 (6) Net profits not recognised in the consolidated profit and loss account 2,759 270 Net profit for the year 4,496 4,450 Dividends approved during the year 11 (2,231) (2,178) Shares issued under 35 – Employee Share Option Scheme 68 88 – Scrip Dividend Scheme 1,115 1,088 Net increase in shareholders’ funds arising from capital transactions 1,183 1,176 Balance as at 31 December 63,499 57,292

The notes on pages 80 to 135 form part of these accounts. Consolidated MTR CORPORATION LIMITED ANNUAL REPORT 2004 79 cash ﬂow statement

for the year ended 31 December in HK$ million Note 2004 2003

Cash flows from operating activities Operating profit from railway and related operations before depreciation 4,546 3,747 Adjustments for: (Decrease)/Increase in provision for obsolete stock (3) 7 Loss on disposal of fixed assets 19 16 (Write-back)/Write-off of revaluation deficit of self-occupied office land and buildings (69) 69 Deferred project study costs written off 64 21 Amortisation of deferred income from lease transaction (5) (4) Exchange loss 3 1 Operating profit from railway and related operations before working capital changes 4,555 3,857 Increase in debtors, deposits and payments in advance (198) (217) Decrease in stores and spares 3 4 Increase in creditors, accrued charges and provisions 129 196 Cash generated from operations 4,489 3,840 Overseas tax paid (3) (3) Net cash generated from operating activities 4,486 3,837

Cash ﬂows from investing activities Capital expenditure – Tseung Kwan O Extension Project (94) (679) – Disneyland Resort Line Project (622) (457) – Tung Chung Cable Car Project (345) (57) – Property development projects (183) (88) – Purchase of assets and other capital projects (1,645) (1,389) Merger studies (53) – Receipts from property developers 1,683 675 Proceeds from properties sold 893 180 Receipts on disposal of ﬁxed assets – 3 Purchase of held-to-maturity debt securities (202) – Principal repayments under Staff Housing Loan Scheme 21 17 Net cash used in investing activities (547) (1,795)

Cash flows from financing activities Shares issued 68 88 Drawdown of loans 7,194 7,441 Repayment of loans (8,787) (8,803) Reduction in capital element of finance lease (112) (103) Receipts of deferred income from lease transaction – 141 Collection/(Release) of refundable deposits and asset replacement reserve funds 19 (3) Interest paid (1,301) (1,643) Interest received 7 14 Interest element of finance lease rental payments (38) (47) Finance charges paid (16) (32) Dividends paid (1,079) (415) Net cash used in financing activities (4,045) (3,362) Net decrease in cash and cash equivalents (106) (1,320) Cash and cash equivalents at 1 January 364 1,684 Cash and cash equivalents at 31 December 26 258 364

The notes on pages 80 to 135 form part of these accounts. 80 Notes to the accounts

1 Principal accounting policies

A Basis of preparation of accounts (i) These accounts have been prepared in compliance with the Hong Kong Companies Ordinance. These accounts have also been prepared in accordance with all applicable Hong Kong Financial Reporting Standards (which include all Statements of Standard Accounting Practice (“SSAPs”) and Interpretations) issued by the Hong Kong Institute of Certiﬁed Public Accountants (“HKICPA”) (previously known as Hong Kong Society of Accountants), accounting principles generally accepted in Hong Kong and the applicable disclosure provisions of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Stock Exchange”).

(ii) The measurement basis used in the preparation of the accounts is historical cost modiﬁed by the revaluation of investment properties and self-occupied ofﬁce land and buildings.

B Basis of consolidation The consolidated accounts include the accounts of the Company and all its subsidiaries except for a non-controlled subsidiary (see note 1D) (the “Group”) made up to 31 December each year. The results of subsidiaries acquired or disposed of during the year are included in the consolidated proﬁt and loss account from or to the date of their acquisition or disposal, as appropriate. All material inter-company transactions and balances are eliminated on consolidation.

C Subsidiaries A subsidiary in accordance with the Hong Kong Companies Ordinance is a company in which the Group, directly or indirectly, holds more than half of the issued share capital, or controls more than half of the voting power, or controls the composition of the board of directors. Subsidiaries are considered to be controlled if the Company has the power, directly or indirectly, to govern the ﬁnancial and operating policies, so as to obtain beneﬁts from their activities.

Intra-group balances and transactions, and any unrealised proﬁts arising from intra-group transactions, are eliminated in full in preparing the consolidated accounts. Unrealised losses resulting from intra-group transactions are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.

Minority interests at the balance sheet date, being the portion of the net assets of subsidiaries attributable to equity interests that are not owned by the Company, whether directly or indirectly through subsidiaries, are presented in the consolidated balance sheet separately from liabilities and the shareholders’ equity. Minority interests in the results of the Group for the year are also separately presented in the proﬁt and loss account.

Where losses attributable to the minority exceed the minority interest in the net assets of a subsidiary, the excess, and any further losses attributable to the minority, are charged against the Group’s interest except to the extent that the minority has a binding obligation to, and is able to, make good the losses. All subsequent proﬁts of the subsidiary are allocated to the Group until the minority’s share of losses previously absorbed by the Group has been recovered.

Investments in subsidiaries are carried in the Company’s balance sheet at cost less any impairment losses (see note 1F).

D Non-controlled subsidiary Octopus Cards Limited (“OCL”) is regarded as a jointly controlled entity as the Group does not have effective control over the Board of OCL. The investment in OCL is accounted for in the consolidated accounts of the Company using the equity method which is initially recorded at cost and adjusted thereafter for the post acquisition change in the Group’s share of OCL’s net assets. The consolidated proﬁt and loss account reﬂects the Group’s share of the results of OCL for the year.

Unrealised proﬁts and losses resulting from transactions between the Group and OCL are eliminated to the extent of the Group’s interest in OCL, except where unrealised losses provide evidence of an impairment of the asset transferred, in which case they are recognised immediately in the proﬁt and loss account.

In the Company’s balance sheet, its investment in OCL is stated at cost less impairment losses, if any. MTR CORPORATION LIMITED ANNUAL REPORT 2004 81

1 Principal accounting policies (continued)

E Fixed assets (i) Investment properties with an unexpired lease term of more than 20 years are stated in the balance sheet at open market value as determined annually by independent professionally qualiﬁed valuers.

Changes in the value of investment properties arising upon revaluations are treated as movements in the investment property revaluation reserve, except:

• where the balance of the investment property revaluation reserve is insufficient to cover a revaluation deficit on a portfolio basis, the excess of the deficit is charged to the profit and loss account; and

• where a revaluation deficit had previously been charged to the profit and loss account and a revaluation surplus subsequently arises, this surplus is firstly credited to the profit and loss account to the extent of the deficit previously charged to the profit and loss account, and is thereafter taken to the investment property revaluation reserve.

On disposal of an investment property, the related portion of the investment property revaluation reserve is transferred to the proﬁt and loss account.

(ii) Leasehold land and buildings comprise leasehold land for railway depots and self-occupied ofﬁce land and buildings:

(a) Leasehold land for railway depots is stated at cost less accumulated depreciation and impairment losses.

(b) Self-occupied office land and buildings are stated in the balance sheet at open market value on the basis of their existing use at the date of revaluation less any subsequent accumulated depreciation. Revaluations are performed by independent qualified valuers every year. Changes in the value of self-occupied office land and buildings arising upon revaluations are treated as movements in the fixed asset revaluation reserve, except:

• where the balance of the fixed asset revaluation reserve relating to a self-occupied office land and building is insufficient to cover a revaluation deficit of that property, the excess of the deficit is charged to the profit and loss account; and

(iii) Civil works and plant and equipment are stated at cost less accumulated depreciation and impairment losses.

(iv) Assets under construction are stated at cost less impairment losses. Cost comprises direct costs of construction, such as materials, staff costs and overheads, together with interest expense capitalised during the period of construction or installation and testing. Capitalisation of these costs ceases and the asset concerned is transferred to ﬁxed assets when substantially all the activities necessary to prepare the asset for its intended use are completed.

(v) Leases of assets under which the lessee assumes substantially all the risks and benefits of ownership are classified as finance leases. Where the Group acquires the use of assets under finance leases, the amounts representing the fair value of the leased asset, or, if lower, the present value of the minimum lease payments (computed using the rate of interest implicit in the lease), of such assets are included in fixed assets and the corresponding liabilities, net of finance charges, are recorded as obligations under finance leases.

Leases of assets under which the lessor has not transferred all the risks and beneﬁts of ownership are classiﬁed as operating leases. Where the Group leases out assets under operating leases, the assets are included in the balance sheet according to their nature and, where applicable, are depreciated in accordance with the Group’s depreciation policies. Impairment losses are accounted for in accordance with the accounting policies on impairment of assets. Revenue arising from operating leases is recognised in accordance with the Group’s revenue recognition policies as set out in note 1T.

(vi) Subsequent expenditure relating to an existing fixed asset is added to the carrying amount of the asset if it is probable that future economic benefit in excess of the originally assessed standard of performance of the asset will flow to the Group.

Expenditure on repairs or maintenance of an existing ﬁxed asset to restore or maintain the originally assessed standard of performance of that asset is charged as an expense when incurred.

(vii) Gains or losses arising from the retirement or disposal of a fixed asset other than an investment property are determined as the difference between the estimated net disposal proceeds and the carrying amount of the asset and are recognised as income or expense in the profit and loss account on the date of retirement or disposal. Any related revaluation surplus is transferred from the fixed asset revaluation reserve to retained profits. 82 Notes to the accounts

1 Principal accounting policies (continued)

F Impairment of assets Internal and external sources of information are reviewed at each balance sheet date to identify indications that the following assets may be impaired or an impairment loss previously recognised no longer exists or may have decreased:

• ﬁxed assets (other than properties carried at revalued amounts);

• railway construction in progress;

• property development in progress;

• deferred expenditure; and

• investments in subsidiaries.

If any such indication exists, the asset’s recoverable amount is estimated.

The recoverable amount of an asset is the greater of its net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and the risks specific to the asset. Where an asset does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the smallest group of assets that generates cash inflows independently (i.e. a cash-generating unit).

An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount.

An impairment loss is reversed if there has been a favourable change in the estimates used to determine the recoverable amount of the asset.

A reversal of impairment losses is limited to the asset’s carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are credited to the proﬁt and loss account in the year in which the reversals are recognised.

G Depreciation (i) Investment properties with an unexpired lease term of more than 20 years are not depreciated.

(ii) Fixed assets other than investment properties and assets under construction are depreciated on a straight line basis at rates sufﬁcient to write off their cost or valuation over their estimated useful lives as follows:

Leasehold Land and Buildings Self-occupied ofﬁce land and buildings ...... the shorter of 50 years and the unexpired term of the lease Leasehold land for railway depots ...... the unexpired term of the lease

Civil Works Rails (initial cost) ...... Indefinite* Excavation and boring ...... Indefinite Tunnel linings, underground civil structures, overhead structures and immersed tubes ...... 100 years Station building structures ...... 80–100 years Depot structures ...... 80 years Concrete kiosk structures ...... 20 years Station architectural finishes ...... 20–30 years

* Replacement costs of rails are charged to the proﬁt and loss account as revenue expenses. MTR CORPORATION LIMITED ANNUAL REPORT 2004 83

1 Principal accounting policies (continued)

Plant and Equipment Rolling stock ...... 7– 40 years Platform screen doors ...... 35 years Environmental control systems, lifts and escalators, fire protection and drainage system ...... 20 –30 years Power supply systems ...... 20– 40 years Automatic fare collection systems, metal station kiosks, and other mechanical equipment ...... 20 years Train control and signalling equipment, station announcement systems, telecommunication systems and advertising panels ...... 15 years Fixture and fitting ...... 10–15 years Maintenance equipment, office furniture and equipment ...... 10 years Computer software licences and applications ...... 5–7 years Cleaning equipment, computer equipment and tools ...... 5 years Motor vehicles ...... 4 years

The useful lives of the various categories of ﬁxed assets are reviewed regularly in the light of actual asset condition, usage experience and the current asset replacement programme. The depreciation charge for the current and future periods is adjusted if there are signiﬁcant changes from previous estimates.

(iii) No depreciation is provided on assets under construction until construction is completed and the assets are ready for their intended use.

(iv) Depreciation on assets held under ﬁnance leases is provided at rates designed to write off the cost of the asset in equal annual amounts over the shorter of the lease term or the anticipated useful life of the asset as set out above, except in cases where title to the asset will be acquired by the Group at the end of the lease where depreciation is provided at rates designed to write off the cost of the asset in equal amounts over the anticipated useful life of the asset.

H Construction costs (i) Costs incurred by the Group in respect of feasibility studies on proposed railway related construction projects (including consultancy fees, in-house staff costs and overheads) are dealt with as follows:

• where the proposed projects are at a preliminary review stage with no certainty of materialising, the costs concerned are written off to the proﬁt and loss account; and

• where the proposed projects are at a detailed study stage, having been agreed in principle by the Board of Directors based on a feasible ﬁnancial plan, the costs concerned are dealt with as deferred expenditure until such time as a project agreement is reached, whereupon the costs are transferred to railway construction in progress.

(ii) After entering into a project agreement, all costs incurred in the construction of the railway are dealt with as railway construction in progress until commissioning of the railway line, whereupon the relevant construction costs are transferred to ﬁxed assets. 84 Notes to the accounts

1 Principal accounting policies (continued)

I Property development (i) Costs incurred by the Group in the preparation of sites for property development are dealt with as property development in progress.

(ii) Payments received from developers in respect of developments are offset against the amounts in property development in progress attributable to that development. Any surplus amounts of payments received from developers in excess of the balance in property development in progress are transferred to deferred income. In these cases, further costs subsequently incurred by the Group in respect of that development are charged against deferred income.

(iii) Expenditure incurred on the development of properties for retention by the Group is transferred to ﬁxed assets when the occupation permits are issued and the properties are put into use.

(iv) When agreement is reached with a developer to redevelop an existing self-occupied property, the relevant property is revalued on an existing use basis prior to commencement of redevelopment. The surplus arising on revaluation is credited to ﬁxed asset revaluation reserve. On commencement of redevelopment, the net book value of the property is transferred to property development in progress.

(v) Proﬁts arising from the development of properties undertaken in conjunction with property developers are recognised in the proﬁt and loss account as follows:

• where the Group receives payments from developers at the commencement of the project, proﬁts arising from such payments are recognised when the foundation and site enabling works are complete and acceptable for development, and after taking into account the outstanding risks and obligations, if any, retained by the Group in connection with the development;

• where the Group receives a share of proceeds from sale of the development, proﬁts arising from such proceeds are recognised upon the issue of occupation permits provided the amounts of revenue and costs can be measured reliably; and

• where the Group receives a distribution of the assets of the development, proﬁt is recognised based on the fair value of such assets at the time of receipt and after taking into account any outstanding risks and obligations retained by the Group in connection with the development.

Upon recognition of proﬁt, the balance of deferred income or property development in progress related to that development is credited or charged to the proﬁt and loss account, as the case may be.

(vi) Where the Group is liable to pay the developer consideration for the retention of part of a property to be redeveloped, profit attributable to the Group in respect of the redevelopment (including any payment received from the developer) will be recognised in the profit and loss account when the quantum of the obligation of the Group and the amount of realised profit can be determined with reasonable accuracy.

(vii) Where properties are received as a proﬁt distribution upon completion of development and are held for sale, those properties are stated at their estimated net realisable value upon receipt. Net realisable value represents the estimated selling price less costs to be incurred in selling the properties. When properties are sold, the carrying amount of those properties is recognised as cost of properties sold in the period in which the related revenue is recognised. The amount of any write-down of properties to net realisable value is recognised as an expense in the period the write-down occurs. The amount of any reversal of any write-down of properties, arising from an increase in net realisable value, is recognised as a reduction in the cost of properties sold in the period in which the reversal occurs.

(viii) Where properties under construction are received as a sharing in kind from a development, these properties are initially recognised in assets under construction at fair value. Further costs incurred in the construction of those assets are capitalised into the assets under construction, which are transferred to ﬁxed assets when substantially all the activities necessary to prepare the assets for their intended use have been completed. MTR CORPORATION LIMITED ANNUAL REPORT 2004 85

1 Principal accounting policies (continued)

J Jointly controlled operations The arrangements entered into by the Group with developers for property developments along the railway lines are considered to be jointly controlled operations pursuant to SSAP 21 “Accounting for interests in joint ventures”. Pursuant to the development arrangements, the Group is normally responsible for its own costs, including in-house staff costs and the costs of enabling works, and the developers normally undertake to pay for all other project costs such as land premium, construction costs, professional fees, etc. Such costs are deductible from the proceeds of sale before surplus proceeds are shared. In respect of its interests in such operations, the Group accounts for the costs of enabling works net of up-front payments received as property development in progress. In cases where up-front payments received from developers exceed the related expenditures incurred by the Group, such excess is recorded as deferred income. Expenses incurred by the Group on staff, overhead and consultancy fees in respect of these developments are also capitalised as property development in progress. The Group’s share of income earned from such operations is recognised in the proﬁt and loss account in accordance with note 1I after netting off any related balance in property development in progress at that time.

K Investments in held-to-maturity securities The Group’s policies for investments in held-to-maturity securities other than investments in its subsidiaries and non-controlled subsidiary are as follows:

(i) Dated debt securities that the Group and/or the Company have the ability and intention to hold to maturity are classiﬁed as held-to-maturity securities. Held-to-maturity securities are stated in the balance sheet at amortised cost less any provisions for diminution in value. Provisions are made when carrying amounts are not expected to be fully recovered and are recognised as expenses in the proﬁt and loss account, such provisions being determined for each investment individually.

(ii) Provisions against the carrying value of held-to-maturity securities are written back when the circumstances and events that led to the write-down or write-off cease to exist and there is persuasive evidence that the new circumstances and events will persist for the foreseeable future.

(iii) Proﬁts or losses on disposal of investments in held-to-maturity securities are determined as the difference between the estimated net disposal proceeds and the carrying amount of the investments and are accounted for in the proﬁt and loss account as they arise.

L Defeasance of long-term lease payments Where commitments to make long-term lease payments have been defeased by the placement of securities, those commitments and securities (and income and charges arising therefrom) have been netted off in order to reﬂect the overall commercial effect of the arrangements. These transactions are not accounted for as leases and these liabilities and investment in securities are not recognised as obligations and assets. Any net amount of cash received from such transactions is accounted for as deferred income and is amortised over the terms of the respective lease.

M Stores and spares Stores and spares used for railway and business operation are categorised as either revenue or capital. Revenue items are stated in the balance sheet at cost, using the weighted average cost method. Provision is made for obsolescence where appropriate. Capital items are included in ﬁxed assets and stated at cost less aggregate depreciation and impairment losses. Depreciation is charged at the rates applicable to the relevant ﬁxed assets against which the capital spares are held in reserve.

N Long-term consultancy contracts The accounting policy for contract revenue is set out in note 1T(iii). When the outcome of a ﬁxed-price consultancy contract can be estimated reliably, contract costs are recognised as expense by reference to the stage of completion of the contract activity at the balance sheet date. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. When the outcome of a consultancy contract cannot be estimated reliably, contract costs are recognised as an expense in the period in which they are incurred.

Consultancy contracts in progress at the balance sheet date are recorded in the balance sheet at the net amount of costs incurred plus recognised proﬁt less recognised losses and progress billings, and are presented in the balance sheet as the “Gross amount due from customers for contract work” (as an asset) or the “Gross amount due to customers for contract work” (as a liability), as applicable. Progress billings not yet paid by the customer are included in the balance sheet under “Debtors, deposits and payments in advance”. Amounts received before the related work is performed are included in the balance sheet, as a liability, under “Creditors, accrued charges and provisions”. 86 Notes to the accounts

1 Principal accounting policies (continued)

O Cash equivalents Cash and cash equivalents comprise cash at banks and in hand, demand deposits with banks and other financial institutions, and short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value, having been within three months of maturity at acquisition. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are also included as a component of cash and cash equivalents for the purpose of the consolidated cash flow statement.

P Employee benefits (i) Salaries, annual leave, leave passage allowance and other costs of non-monetary benefits are accrued and recognised as an expense in the year in which the associated services are rendered by employees of the Group, except those benefits incurred for project staff in respect of construction projects and capital works, which are capitalised as part of the cost of the qualifying assets.

(ii) Contributions to deﬁned contribution retirement plans, including contributions to Mandatory Provident Funds (“MPF”) as required under the Hong Kong Mandatory Provident Fund Schemes Ordinance, are recognised as an expense in the proﬁt and loss account as incurred, except those contributions for project staff incurred in respect of construction projects and capital works, which are capitalised as part of the cost of the qualifying assets.

(iii) The Group’s net obligation in respect of defined benefit retirement plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior years; that benefit is discounted to determine the present value, and the fair value of any plan assets is deducted. The discount rate is the yield at balance sheet date on high quality corporate bonds that have maturity dates approximating the terms of the Group’s obligations. If there is no deep market in such bonds, the market yield on government bonds would be used. The calculation is performed by a qualified actuary using the projected unit credit method.

When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised either as an expense in the profit and loss account, or capitalised as part of the cost of the relevant construction projects or capital works in the case of project related employees, as the case may be, on a straight-line basis over the average period until the benefits become vested. To the extent that the benefits vest immediately, the expense is recognised immediately in a similar manner.

In calculating the Group’s obligation in respect of a plan, to the extent that any cumulative unrecognised actuarial gain or loss exceeds ten percent of the greater of the present value of the defined benefit obligation and the fair value of plan assets, that portion is recognised in the profit and loss account over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognised.

Where the calculation of the Group’s net obligation results in a negative amount, the asset recognised is limited to the net total of any cumulative unrecognised net actuarial losses and past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.

(iv) When the Group grants employees options to acquire shares of the Company, no employee beneﬁt cost or obligation is recognised at the date of grant. When the options are exercised, equity is increased by the amount of the proceeds received.

(v) Termination beneﬁts are recognised when, and only when, the Group demonstrably commits itself to terminate employment or to provide beneﬁts as a result of voluntary redundancy by having a detailed formal plan which is without realistic possibility of withdrawal.

Q Retirement Schemes The Group operates an Occupational Retirement Scheme (the “MTR Corporation Limited Retirement Scheme”), which is supplemented by a top-up scheme (“MTR Corporation Limited Retention Bonus Scheme”) mainly for project staff to provide extra beneﬁts in the event of redundancy.

In addition, the Group has set up a MPF Scheme by participating in a master trust scheme provided by an independent MPF service provider to comply with the requirements under the MPF Ordinance.

Employer’s contributions to the deﬁned contribution section of the MTR Corporation Limited Retirement Scheme and the MPF Scheme are recognised in the accounts in accordance with the policy set out in note 1P(ii). MTR CORPORATION LIMITED ANNUAL REPORT 2004 87

1 Principal accounting policies (continued)

The employer’s contributions paid and payable in respect of employees of the hybrid benefit section of the MTR Corporation Limited Retirement Scheme, as calculated annually by independent actuaries in accordance with the Retirement Scheme Rules and provisions of the Occupational Retirement Schemes Ordinance, are used to satisfy the pension expenses recognised in the accounts according to note 1P(iii). Any deficit or surplus thereof will be dealt with in the balance sheet as accrued or prepaid benefit expenses, as the case may be.

R Income tax (i) Income tax for the year comprises current tax and movements in deferred tax assets and liabilities. Income tax is recognised in the proﬁt and loss account except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

(ii) Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.

(iii) Deferred tax assets and liabilities arise from deductible and taxable temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes and their tax bases. Deferred tax assets also arise from unused tax losses and unused tax credits.

Apart from certain limited exceptions, all deferred tax liabilities, and all deferred tax assets to the extent that it is probable that future taxable proﬁts will be available against which the asset can be utilised, are recognised. Future taxable proﬁts that may support the recognition of deferred tax assets arising from deductible temporary differences include those that will arise from the reversal of existing taxable temporary differences, provided those differences relate to the same taxation authority and the same taxable entity, and are expected to reverse either in the same period as the expected reversal of the deductible temporary difference or in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. The same criteria are adopted when determining whether existing taxable temporary differences support the recognition of deferred tax assets arising from unused tax losses and credits, that is, those differences are taken into account if they relate to the same taxation authority and the same taxable entity, and are expected to reverse in a period, or periods, in which the tax loss or credit can be utilised.

The limited exceptions to recognition of deferred tax assets and liabilities are those temporary differences arising from the initial recognition of assets or liabilities that affect neither accounting nor taxable proﬁt (provided they are not part of a business combination) and investments in subsidiaries to the extent that, in the case of taxable differences, the Group controls the timing of the reversal and it is probable that the differences will not reverse in the foreseeable future, or in the case of deductible differences, unless it is probable that they will reverse in the future.

The amount of deferred tax recognised is measured based on the expected manner of realisation or settlement of the carrying amount of the assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. Deferred tax assets and liabilities are not discounted.

(iv) Current tax balances and deferred tax balances, and movements therein, are presented separately from each other and are not offset. Current tax assets are offset against current tax liabilities, and deferred tax assets against deferred tax liabilities if, and only if, the Company or the Group has the legally enforceable right to set off current tax assets against current tax liabilities and the following additional conditions are met:

• in the case of current tax assets and liabilities, the Company or the Group intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously; or

• in the case of deferred tax assets and liabilities, if they relate to income taxes levied by the same taxation authority on either:

– the same taxable entity; or

– different taxable entities, which, in each future period in which signiﬁcant amounts of deferred tax liabilities or assets are expected to be settled or recovered, intend to realise the current tax assets and settle the current tax liabilities on a net basis or realise and settle simultaneously. 88 Notes to the accounts

1 Principal accounting policies (continued)

S Provisions and contingent liabilities Provisions are recognised for liabilities of uncertain timing or amount when the Company or Group has a legal or constructive obligation arising as a result of a past event, it is probable that an outﬂow of economic beneﬁts will be required to settle the obligation and a reliable estimate can be made. Where the time value of money is material, provisions are stated at the present value of the expenditures expected to settle the obligation.

Where it is not probable that an outflow of economic benefits will be required, or the amount cannot be estimated reliably, the obligation is disclosed as a contingent liability, unless the probability of outflow of economic benefits is remote. Possible obligations, whose existence will only be confirmed by the occurrence or non-occurrence of one or more future events are also disclosed as contingent liabilities unless the probability of outflow of economic benefits is remote.

T Revenue recognition Provided it is probable that the economic benefits associated with the transactions will flow to the Group and the amount of revenue can be measured reliably, revenue is recognised in the profit and loss account as follows:

(i) Fare revenue is recognised when the journey is provided.

(ii) Advertising income and service fees from telecommunication services provided within the railway are recognised when the services are provided.

(iii) Contract revenue is recognised when the outcome of a consultancy contract can be estimated reliably. Contract revenue is recognised using the percentage of completion method, measured by reference to the percentage of contract costs incurred to date to estimated total contract costs for the contract. When the outcome of a consultancy contract cannot be estimated reliably, revenue is recognised only to the extent of contract costs incurred that it is probable will be recoverable.

(iv) Rental income from investment properties, station kiosks and other railway premises under operating leases is accounted for in accordance with the terms of the leases. Lease incentives granted are recognised in the proﬁt and loss account as an integral part of the aggregate net lease payments receivable. Contingent rentals are recognised as income in the accounting period in which they are earned. Property management income is recognised when the services are provided.

U Operating lease charges Rentals payable under operating leases are charged on a straight-line basis over the period of the lease to the proﬁt and loss account, except for rentals payable in respect of railway construction, property development in progress and proposed capital projects which are capitalised as part of railway construction in progress, property development in progress and deferred expenditure respectively.

V Interest and finance charges Interest expense directly attributable to the financing of capital projects prior to their completion or commissioning is capitalised. Exchange differences arising from foreign currency borrowings related to the acquisition of assets are capitalised to the extent that they are regarded as an adjustment to interest costs. Interest expense attributable to other purposes is charged to the profit and loss account.

Finance charges implicit in the lease payments on assets held under ﬁnance leases are charged to the proﬁt and loss account over the period of the lease so as to produce an approximately constant periodic rate of charge on the remaining balance of the obligations for each accounting period.

The differentials paid and received on interest rate swap agreements are accrued and recognised as adjustments to interest expense. MTR CORPORATION LIMITED ANNUAL REPORT 2004 89

1 Principal accounting policies (continued)

W Foreign currency translation Foreign currency transactions during the year are translated into Hong Kong dollars and recorded at exchange rates ruling at the transaction dates. Foreign currency monetary assets and liabilities are translated into Hong Kong dollars at the exchange rates ruling at the balance sheet date. Forward foreign exchange contracts, swaps and options used as a hedge against foreign currency liabilities are revalued at the balance sheet date at the exchange rates ruling at that date. Gains and losses on currency hedging transactions are used to offset gains and losses resulting from currency ﬂuctuations inherent in the underlying foreign currency liabilities. Differences arising on foreign currency translation and revaluation of forward foreign exchange contracts, swaps and options are dealt with in the proﬁt and loss account.

The results of foreign enterprises are translated into Hong Kong dollars at the average exchange rates for the year; balance sheet items are translated into Hong Kong dollars at the rates of exchange ruling at the balance sheet date. The resulting exchange differences are dealt with as a movement in reserves.

X Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment), or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments.

In accordance with the Group’s internal ﬁnancial reporting system, the Group has chosen business segment information as the primary reporting format. As substantially all the principal activities of the Group are carried out in Hong Kong, no geographical segment information is provided.

Segment revenue, expenses, results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis to that segment. Segment revenue, expenses, assets and liabilities are determined before intra-group balances and intra-group transactions are eliminated as part of the consolidation process, except to the extent that such intra-group balances and transactions are between group enterprises within a single segment.

Segment capital expenditure is the total cost incurred during the year to acquire segment assets that are expected to be used for more than one year.

Unallocated items mainly comprise ﬁnancial and corporate assets, interest-bearing loans, borrowings, share of results of non-controlled subsidiary, corporate and ﬁnancing expenses and minority interests.

Y Related parties For the purposes of these financial statements, parties are considered to be related to the Group if the Group has the ability, directly or indirectly, to control the party or exercise significant influence over the party in making financial and operating decisions, or vice versa, or where the Group and the party are subject to common control or common significant influence. Related parties may be individuals or other entities.

Z Government grants Government grants are assistance by Government in the form of transfer of resources in return for the Company’s compliance to the conditions attached thereto. Government grant which represents compensation for the cost of an asset, will be deducted from the cost of the asset in arriving at its carrying value to the extent of the amounts received and receivable as at the date of the balance sheet. Any excess of the amount of grant received or receivable over the cost of the asset at the balance sheet date will be carried forward as advance receipts to set off future cost of the asset. 90 Notes to the accounts

2 Fare revenue

in HK$ million 2004 2003

Fare revenue comprises: MTR Lines 5,417 5,064 Airport Express Line 515 425 5,932 5,489

The MTR Lines comprise the Kwun Tong, Tsuen Wan, Island, Tung Chung and Tseung Kwan O Lines.

3 Non-fare revenue

A Station commercial and other revenue

in HK$ million 2004 2003

Station commercial and other revenue comprises: Advertising 467 386 Kiosk rental 298 275 Telecommunication income 238 198 Consultancy income 182 143 Miscellaneous business revenue 126 115 1,311 1,117

B Rental and management income

in HK$ million 2004 2003

Rental income was attributable to: Telford Plaza 388 365 Luk Yeung Galleria 117 114 Paradise Mall 115 119 Maritime Square 224 209 International Finance Centre 77 10 Other properties 73 71 994 888 Management income 108 94 Property agency income 6 6 1,108 988

Included in rental income is service income of HK$63 million (2003: HK$63 million) relating to the provision of air conditioning services. The leasing of Two International Finance Centre commenced in September 2003. MTR CORPORATION LIMITED ANNUAL REPORT 2004 91

4 Operating expenses before depreciation

A Included in staff costs and related expenses are the following retirement expenses: in HK$ million 2004 2003

Contributions to defined contribution plans and Mandatory Provident Fund 16 13 Expense recognised in respect of defined benefit plans (Note 38C) 138 156 154 169

Other staff costs and related expenses of HK$902 million (2003: HK$943 million) are included in construction projects, capital and revenue works, and non-fare related operations.

B Repairs and maintenance costs relate mainly to contracted maintenance and revenue works. Other routine repairs and maintenance works are performed by in-house operations, the costs of which are included under staff costs and stores and spares consumed.

C Project study and business development expenses comprise: in HK$ million 2004 2003

Tseung Kwan O Extension Further Capital Works Project (Note 15) 49 – West Island Line / South Island Line (Note 17) 15 21 New business development expenses 103 28 167 49

New business development expenses relate mainly to studies on business opportunities in China and Europe in line with the Group’s business strategy.

D Included in general and administration expenses and other expenses are the following charges/(credits): in HK$ million 2004 2003

Auditors’ remuneration – audit services 4 3 – other services 1 1 (Write-back)/Write-off of deficit on revaluation of self-occupied office land and buildings (Note 14D) (69) 69 Loss on disposal of fixed assets 19 16 Operating lease expenses: Office buildings and staff quarters 10 12 Less: Amount capitalised 3 5 7 7

Other services under auditors’ remuneration include an amount of HK$0.4 million (2003: HK$0.4 million) relating to tax compliance services provided during the year. 92 Notes to the accounts

5 Remuneration of Members of the Board and the Executive Directorate

A Remuneration of Members of the Board and the Executive Directorate (i) The aggregate emoluments of the Members of the Board and the Executive Directorate of the Company disclosed pursuant to section 161 of the Hong Kong Companies Ordinance were as follows:

in HK$ million 2004 2003

Fees 3 2 Salaries, housing allowances and other beneﬁts-in-kind 28 28 Variable remuneration related to performance 8 3 Retirement scheme contributions 3 4 42 37

The above emoluments do not include realised gains on exercise of share options amounting to HK$5.1 million (2003: HK$8.7 million) in respect of certain Members of the Executive Directorate, which are disclosed under the paragraph “Board Members and Executive Directorate’s Interest in Shares” of the Report of the Members of the Board.

Non-executive directors of the Company are not appointed for a speciﬁc term but are subject (save as those appointed pursuant to Section 8 of the Mass Transit Railway Ordinance (Chapter 556 of the Laws of Hong Kong)) to retirement by rotation and re-election at the Company’s annual general meetings in accordance with Articles 87 and 88 of the Company’s Articles of Association.

(ii) The gross emoluments (excluding share option beneﬁt) of the Members of the Board and the Members of the Executive Directorate were within the following bands:

2004 2003 Emoluments Number Number

HK$0 – HK$500,000 9 8 HK$500,001 – HK$1,000,000 1 2 HK$4,000,001 – HK$4,500,000 – 3 HK$4,500,001 – HK$5,000,000 4 2 HK$5,000,001 – HK$5,500,000 2 1 HK$6,000,001 – HK$6,500,000 – 1 HK$9,000,001 – HK$9,500,000 1 – 17 17

The information shown in the above table includes the ﬁve highest paid employees. The independent non-executive directors’ emoluments are included in the ﬁrst remuneration band except the non-executive Chairman, whose emolument is included in the second remuneration band. Emolument of the ex-Chairman, Jack C K So who resigned on 20 July 2003, is included under the highest remuneration band in 2003. MTR CORPORATION LIMITED ANNUAL REPORT 2004 93

5 Remuneration of Members of the Board and the Executive Directorate (continued)

(iii) The remuneration details (excluding share option beneﬁt) of the current members of the Executive Directorate are shown below: 2004 2003 Base pay, allowance, retirement scheme Variable contribution remuneration and other related to in HK$ million beneﬁts performance Total Total

Chief Executive Ofﬁcer (“CEO”)* 5.61 3.44 9.05 0.68 Finance Director 3.89 0.75 4.64 4.30 Human Resources Director 4.11 0.75 4.86 4.45 Legal Director and Secretary 4.26 0.75 5.01 4.67 Managing Director – Operations & Business Development 4.50 0.81 5.31 5.11 Project Director 4.10 0.77 4.87 4.65 Property Director 4.10 0.75 4.85 4.46 30.57 8.02 38.59 28.32

* Appointed in December 2003

(iv) The CEO will be entitled to receive 700,000 shares in the Company (or their equivalent value in cash) on completion of his three-year contract (i.e. 30 November 2006). The ﬁnal number of shares (or cash amount) delivered may be adjusted to reﬂect relevant changes (if any) in the Company’s share capital after his appointment in order that the CEO’s compensation is closely tied to the Company’s longer-term performance and aligns his interests with those of shareholders. In certain limited circumstances, the CEO may be entitled to receive some or all of the shares (or the cash amount) prior to completion of his contract.

The restricted shares were offered in order to provide a competitive level of compensation and to enable the CEO’s total pay to be closely tied to the performance of the Company.

B Share options Options exercised and outstanding in respect of each Member of the Executive Directorate as at 31 December 2004 are set out under the paragraph “Board Members and Executive Directorate’s Interest in Shares” of the Report of the Members of the Board. Details of the options granted to Members of the Executive Directorate are as follows:

(i) Pre-Global Offering Share Option Scheme Under the Company’s Pre-Global Offering Share Option Scheme (“Pre-IPO Option Scheme”) described in note 43A, Jack C K So (ex-Chairman) and each of the other Members of the Executive Directorate, except C K Chow and Lincoln K K Leong, were granted options on 20 September 2000 to acquire 1,599,000 and 1,066,000 shares respectively. C K Chow and Lincoln K K Leong joined the Company on 1 December 2003 and 1 February 2002 respectively and are not beneﬁciaries of the Pre-IPO Option Scheme.

Under the vesting terms of the Pre-IPO Option Scheme, each eligible Member of the Executive Directorate must continue to beneﬁcially own (i) at all times after 26 October 2001, at least 40,000 shares in the case of the ex-Chairman and at least 23,000 shares in the case of other Members of the Executive Directorate; and (ii) at all times after 26 October 2002, at least 80,000 shares in the case of the ex-Chairman and at least 46,000 shares in the case of other Members of the Executive Directorate, in each case, up to and including the date on which he has exercised his option in full or the date on which his option lapses (whichever is earlier).

(ii) New Joiners Share Option Scheme Under the New Joiners Share Option Scheme (“New Option Scheme”) as described in note 43B, Lincoln K K Leong, a Member of the Executive Directorate, was granted options to acquire 1,066,000 shares on 1 August 2003.

Under the vesting terms of the New Option Scheme, the grantee must continue to beneﬁcially own (i) at all times on and after 4 August 2004, at least 23,000 shares; and (ii) at all times on and after 4 August 2005, at least 46,000 shares, up to and including the date on which he has exercised his option in full or the date on which his option lapses (whichever is earlier). 94 Notes to the accounts

6 Proﬁt on property developments

in HK$ million 2004 2003

Profit on property developments comprises: Transfer from deferred income on up-front payments (Note 16B(i)) 1,601 1,286 Share of surplus from development 1,665 7 Profit on sale of properties held for sale 301 44 Profit recognised from sharing in kind (Note 16B(ii)) 1,008 4,034 Other overhead costs (7) (2) 4,568 5,369

Included in proﬁt on sale of properties held for sale are write-back of prior year provision amounting to HK$16 million (2003: write- down of HK$16 million) and cost of properties sold of HK$422 million (2003: HK$243 million).

7 Depreciation

in HK$ million 2004 2003

Depreciation comprised charges on: Railway operations – on fixed assets held under finance leases 19 19 – on other railway fixed assets 2,354 2,251 Assets relating to station advertising, kiosk and miscellaneous businesses 117 109 Unallocated corporate assets 22 23 2,512 2,402

8 Interest and ﬁnance charges

in HK$ million 2004 2003

Interest expenses in respect of: Bank loans and overdrafts, and capital market instruments wholly repayable within 5 years 668 680 Capital market instruments not wholly repayable within 5 years 764 901 Obligations under ﬁnance leases 35 43 Finance charges 35 36 Exchange loss/(gain) 2 (7) Interest expenses capitalised: Disneyland Resort Line Project (7) (1) Tung Chung Cable Car Project (12) (2) AsiaWorld-Expo Station Project (1) (1) Other capital projects (13) (78) Assets under construction (14) (20) (47) (102) 1,457 1,551 Interest income in respect of: Deposits with banks and other ﬁnancial institutions (5) (10) Staff housing loans (2) (2) (7) (12) 1,450 1,539

Interest expenses have been capitalised at the average cost of funds to the Group calculated on a monthly basis. The average interest rates for each month varied from 4.1% to 5.2% per annum during the year (2003: 4.0% to 5.5% per annum). MTR CORPORATION LIMITED ANNUAL REPORT 2004 95

9 Income tax

A Income tax in the consolidated proﬁt and loss account represents: in HK$ million 2004 2003

Current tax – overseas tax for the year 4 4 Deferred tax – origination and reversal of temporary differences 691 443 – effect of increase in tax rate on deferred tax balances at 1 January 2003 – 300 691 743 Share of non-controlled subsidiary’s taxation 5 1 700 748

No provision for current Hong Kong profits tax has been made in the consolidated profit and loss account in respect of the Company and its subsidiaries, as the Company and its subsidiaries either have substantial accumulated tax losses brought forward which are available for set off against current year’s assessable profits or have sustained tax losses for the year ended 31 December 2004. Taxation for overseas subsidiaries is charged at the appropriate current rates of taxation ruling in the relevant countries.

In March 2003, the Hong Kong Government announced an increase in the Proﬁts Tax rate applicable to the Group’s operations in Hong Kong from 16% to 17.5%. This increase was taken into account in the preparation of the Group’s 2003 accounts.

B Reconciliation between tax expense and accounting proﬁt at applicable tax rates

2004 2003 HK$ million % HK$ million %

Profit before tax 5,196 5,198 Notional tax on profit before tax, calculated at the rates applicable to profits in the tax jurisdictions concerned 905 17.4 926 17.8 Tax effect of non-deductible expenses 24 0.5 53 1.0 Tax effect of non-taxable revenue (220) (4.2) (531) (10.2) Tax effect of unused tax losses not recognised 2––– Tax effect of tax losses not recognised in previous years (11) (0.2) –– Effect on opening deferred tax balances resulting from an increase in tax rate during the year ––300 5.8 Actual tax expenses 700 13.5 748 14.4

10 Proﬁt attributable to shareholders

The consolidated proﬁt attributable to shareholders includes a proﬁt of HK$4,479 million (2003: HK$4,379 million) which has been dealt with in the accounts of the Company. 96 Notes to the accounts

11 Dividends

Dividends paid and proposed during the year comprised:

in HK$ million 2004 2003

Dividend approved and paid – 2003 ﬁnal dividend of 28 cents (2002: 28 cents) per share approved and paid in 2004 1,481 1,444 – 2004 interim dividend of 14 cents (2003: 14 cents) per share 750 734 2,231 2,178 Dividend proposed – Final dividend proposed after the balance sheet date of 28 cents (2003: 28 cents) per share 1,509 1,481

The ﬁnal dividend proposed after the balance sheet date has not been recognised as a liability at the balance sheet date.

During the year, scrip dividend elections were offered to shareholders with Hong Kong addresses. The Company’s majority shareholder, The Financial Secretary Incorporated (“FSI”), had elected to receive part of its entitlement to dividends in the form of scrip to the extent necessary to ensure that the amount payable in cash would not exceed 50% of the total dividend payable. Details of dividends paid to the FSI are disclosed in note 41J. On 26 February 2004, the Government agreed to extend the scrip dividend arrangement for the three ﬁnancial years ending 31 December 2006.

Pursuant to the ﬁnancing arrangement under the Disneyland Resort Line (previously known as Penny’s Bay Rail Link) Project Agreement entered into between the Group and the Government, HK$37 million (2003: HK$675 million) cash dividend declared and payable to the Government during the year has been waived (note 41E).

12 Earnings per share

The calculation of basic earnings per share is based on the proﬁt for the year attributable to shareholders of HK$4,496 million (2003: HK$4,450 million) and the weighted average number of ordinary shares of 5,331,253,996 in issue during the year (2003: 5,214,028,094).

The calculation of diluted earnings per share is based on the proﬁt for the year attributable to shareholders of HK$4,496 million (2003: HK$4,450 million) and the weighted average number of ordinary shares of 5,337,217,673 in issue during the year (2003: 5,217,462,182) after adjusting for the number of dilutive potential ordinary shares under the employee share option schemes calculated as follows:

2004 2003

Weighted average number of ordinary shares used in calculating basic earnings per share 5,331,253,996 5,214,028,094 Number of ordinary shares deemed to be issued for no consideration 5,963,677 3,434,088 Weighted average number of ordinary shares used for calculating the diluted earnings per share 5,337,217,673 5,217,462,182 MTR CORPORATION LIMITED ANNUAL REPORT 2004 97

13 Segmental information

The results of major business activities are summarised below: Total Station Property railway commercial ownership operations Railway and other and and related Property in HK$ million operations businesses management activities developments Total

2004 Revenue 5,932 1,311 1,108 8,351 – 8,351 Less: Operating expenses before depreciation 2,889 315 207 3,411 – 3,411 3,043 996 901 4,940 – 4,940 Profit on property developments––––4,568 4,568 Operating profit before depreciation 3,043 996 901 4,940 4,568 9,508 Less: Depreciation 2,369 117 4 2,490 – 2,490 674 879 897 2,450 4,568 7,018 Unallocated corporate expenses (416) Interest and finance charges (1,450) Share of profit of non-controlled subsidiary 44 Income tax (700) Profit for the year ended 31 December 2004 4,496 Assets Operational assets 79,021 1,304 17,045 97,370 282 97,652 Railway construction in progress 962 – – 962 – 962 Assets under construction 869 5 – 874 2,177 3,051 Property development in progress – – – – 2,088 2,088 Investments in held-to-maturity securities – 202 – 202 – 202 Properties held for sale – – – – 815 815 80,852 1,511 17,045 99,408 5,362 104,770 Interest in non-controlled subsidiary 63 Unallocated assets 1,841 Total assets 106,674 Liabilities Segmented liabilities 2,087 354 463 2,904 483 3,387 Deferred income 132 – – 132 4,506 4,638 2,219 354 463 3,036 4,989 8,025 Unallocated liabilities 35,142 Minority interests 8 Total liabilities 43,175 Other Information Capital expenditure on: Operational assets and assets under construction 729 130 33 Railway construction in progress 875 Property development in progress 184 Non-cash expenses other than depreciation 19 6 – 98 Notes to the accounts

13 Segmental information (continued) Total Station Property railway commercial ownership operations Railway and other and and related Property in HK$ million operations businesses management activities developments Total

2003 Revenue 5,489 1,117 988 7,594 – 7,594 Less: Operating expenses before depreciation 2,878 351 198 3,427 – 3,427 2,611 766 790 4,167 – 4,167 Profit on property developments––––5,3695,369 Operating profit before depreciation 2,611 766 790 4,167 5,369 9,536 Less: Depreciation 2,266 109 4 2,379 – 2,379 345 657 786 1,788 5,369 7,157 Unallocated corporate expenses (443) Interest and finance charges (1,539) Share of profit of non-controlled subsidiary 23 Income tax (748) Profit for the year ended 31 December 2003 4,450 Assets Operational assets 80,556 1,323 14,450 96,329 364 96,693 Railway construction in progress 181 – – 181 – 181 Railway assets under construction 930 10 – 940 – 940 Property development in progress––––2,3092,309 Properties held for sale ––––812812 81,667 1,333 14,450 97,450 3,485 100,935 Interest in non-controlled subsidiary 110 Unallocated assets 1,321 Total assets 102,366 Liabilities Segmented liabilities 3,000 254 358 3,612 368 3,980 Deferred income 137 – – 137 4,924 5,061 3,137 254 358 3,749 5,292 9,041 Unallocated liabilities 36,025 Minority interests 8 Total liabilities 45,074 Other Information Capital expenditure on: Operational assets and assets under construction 2,586 179 3,629 Railway construction in progress 719 Property development in progress 161 Non-cash expenses other than depreciation 19 2 –

No geographical analysis is shown as substantially all the principal activities of the Company and its subsidiaries are carried out in Hong Kong throughout the reporting periods. MTR CORPORATION LIMITED ANNUAL REPORT 2004 99

14 Fixed assets

The Group Leasehold Assets Investment land and Civil Plant and under in HK$ million properties buildings works equipment construction Total

Cost or Valuation At 1 January 2004 14,169 1,598 45,740 54,319 940 116,766 Additions 32 – – 49 3,245 3,326 Capitalisation adjustments* – – (124) (156) – (280) Disposals/Write-offs – – (1) (172) (4) (177) Surplus on revaluation (Note 36) 2,486 311 – – – 2,797 Write back of revaluation deﬁcit (Note 4D) – 69 – – – 69 Reclassiﬁcation – – 82 (82) – – Other assets commissioned – – 7 1,123 (1,130) – At 31 December 2004 16,687 1,978 45,704 55,081 3,051 122,501

At Cost – 732 45,704 55,081 3,051 104,568 At 31 December 2004 Valuation 16,687 1,246 – – – 17,933

Aggregate depreciation At 1 January 2004 – 98 2,705 17,042 – 19,845 Charge for the year – 33 392 2,107 – 2,532 Capitalisation adjustments* – – (3) (17) – (20) Written back on disposal – – (1) (148) – (149) Written back on revaluation (Note 36) –(20)–––(20) At 31 December 2004 – 111 3,093 18,984 – 22,188 Net book value at 31 December 2004 16,687 1,867 42,611 36,097 3,051 100,313 Net book value at 31 December 2003 14,169 1,500 43,035 37,277 940 96,921

Depreciation charge for the year was HK$2,512 million, comprising depreciation for the year of HK$2,532 million less adjustments for the capitalisation of HK$20 million. 100 Notes to the accounts

14 Fixed assets (continued)

The Company Leasehold Assets Investment land and Civil Plant and under in HK$ million properties buildings works equipment construction Total

Cost or Valuation At 1 January 2004 14,169 1,598 45,740 53,693 922 116,122 Additions 32 – – 43 3,222 3,297 Capitalisation adjustments* – – (124) (156) – (280) Disposals/Write-offs – – (1) (172) (4) (177) Surplus on revaluation (Note 36) 2,486 311 – – – 2,797 Write back of revaluation deﬁcit (Note 4D) – 69 – – – 69 Reclassiﬁcation – – 82 (82) – – Other assets commissioned – – 7 1,088 (1,095) – At 31 December 2004 16,687 1,978 45,704 54,414 3,045 121,828

At Cost – 732 45,704 54,414 3,045 103,895 At 31 December 2004 Valuation 16,687 1,246 – – – 17,933

Aggregate depreciation At 1 January 2004 – 98 2,705 16,597 – 19,400 Charge for the year – 33 392 2,039 – 2,464 Capitalisation adjustments* – – (3) (17) – (20) Written back on disposal – – (1) (148) – (149) Written back on revaluation (Note 36) – (20) – – – (20) At 31 December 2004 – 111 3,093 18,471 – 21,675 Net book value at 31 December 2004 16,687 1,867 42,611 35,943 3,045 100,153 Net book value at 31 December 2003 14,169 1,500 43,035 37,096 922 96,722

* Capitalisation adjustments relate to certain railway assets capitalised at time of commissioning based on contractors’ claimed values. Such assets’ final values have been adjusted downward following finalisation of contract claims with contractors at lower final contract values during the year.

Depreciation charge for the year was HK$2,444 million, comprising depreciation for the year of HK$2,464 million less adjustments for the capitalisation of HK$20 million.

A The analysis of the investment properties and leasehold land and buildings held in Hong Kong are as follows:

The Group and The Company Leasehold land and buildings Investment Leasehold land for Ofﬁce land and properties railway depots buildings in HK$ million 2004 2003 2004 2003 2004 2003

At net book value or valuation – long leases 1,431 1,283 163 166 23 15 – medium-term leases 15,256 12,886 458 468 1,223 852 16,687 14,169 621 634 1,246 867

None of the Group’s investment properties carries an unexpired lease term of 20 years or less. MTR CORPORATION LIMITED ANNUAL REPORT 2004 101

14 Fixed assets (continued)

B The lease of the land on which the civil works, plant and equipment are situated for the operation of the railway was granted to the Company under a running line lease for the period up to 30 June 2047, which has been extended to 29 June 2050. It is assumed that the lease will be renewed and that the operation of the railway will continue after 2050.

Under the terms of the lease, the Company undertakes to keep and maintain all the leased areas, including underground and overhead structures, at its own cost. With respect to parts of the railway situated in structures where access is shared with other users, such as the Lantau Fixed Crossing, the Company’s obligation for maintenance is limited to the railway only. All maintenance costs incurred under the terms of the lease have been dealt with as railway operating costs in the proﬁt and loss account.

C All the investment properties of the Group were revalued at 31 December 2004 by an independent ﬁrm of surveyors, DTZ Debenham Tie Leung, who have among their staff Members of the Hong Kong Institute of Surveyors, at open market value. The valuations are based on a “term and reversion basis”, which capitalises the existing and reversionary net rental income having regard to market valuation checks on comparable sale and yields. The net revaluation surplus of HK$2,486 million (2003: HK$276 million) arising from the revaluation has been credited to the investment property revaluation reserve (note 36).

D All self-occupied office land and buildings were revalued at 31 December 2004 by an independent firm of surveyors, DTZ Debenham Tie Leung, who have among their staff Members of the Hong Kong Institute of Surveyors, at open market value on an existing use basis. The valuation resulted in a net revaluation surplus of HK$400 million (2003: deficit of HK$71 million). According to the Company's policy under note 1E(ii)(b), HK$69 million of the surplus has been credited to the profit and loss account in respect of deficit previously charged in respect of the same property (note 4D). The remaining HK$331 million of the surplus, net of deferred tax of HK$58 million (note 34B), has been transferred to the fixed asset revaluation reserve account (note 36).

The carrying amount of the self-occupied land and buildings at 31 December 2004 would have been HK$936 million (2003: HK$958 million) had the ofﬁce land and buildings been stated at cost less accumulated depreciation.

E Assets under construction include an unrenovated shell of the retail shopping centre at Union Square, Kowloon Station and its car parking spaces received by the Company as a sharing in kind from the development. The properties under construction are stated at cost, which is deemed to be the fair value upon receipt (note 1I(viii)) which is determined by reference to an open market valuation undertaken by an independent ﬁrm of surveyors, Jones Lang LaSalle, who have among their staff Members of the Hong Kong Institute of Surveyors.

F Fixed assets include the following assets held under agreements which are treated as ﬁnance leases:

The Group and The Company Aggregate Net book Net book Cost depreciation value value in HK$ million 2004 2004 2004 2003

Civil works – Eastern Harbour Crossing 1,254 269 985 1,005

The Company has entered into a Management Agreement (the “Agreement”) with New Hong Kong Tunnel Company Limited to operate the Eastern Harbour Crossing until 2008. Included in the assets held under the Agreement are railway and ancillary works relating to the rail tunnel.

At the expiry of the Agreement, title to the assets will, pursuant to the Eastern Harbour Crossing Ordinance, be vested in the Government which has in turn entered into a Memorandum of Understanding dated 17 October 1986 with the Company to the effect that the assets will be vested in the Company on terms to be agreed between the Company and the Government. On 30 June 2000, the Company entered into a further agreement with the Government pursuant to which the relevant assets will be vested by the Government into the Company in 2008 for a nominal consideration and the Company agreed to indemnify the Government for certain amounts which are expected to be nominal. On this basis, the semi-annual payments made by the Company to New Hong Kong Tunnel Company Limited in respect of the Eastern Harbour Crossing are dealt with in these accounts as payments under a ﬁnance lease. 102 Notes to the accounts

14 Fixed assets (continued)

G The Group leases out investment properties and station kiosks under operating leases. The leases typically run for an initial period of one to ten years, with an option to renew the lease after that date at which time all terms will be renegotiated. Lease payments are usually adjusted annually to reﬂect market rentals. Certain leases carry additional rental based on turnover. Lease incentives granted are amortised in the proﬁt and loss account as an integral part of the net lease payment receivable.

The gross carrying amounts of investment properties of the Group and the Company held for use in operating leases were HK$16,687 million (2003: HK$14,169 million). The gross carrying amounts of station kiosks held for use in operating leases were HK$416 million (2003: HK$352 million) and the related accumulated depreciation charges were HK$80 million (2003: HK$65 million).

The Group’s total future minimum lease receipts under non-cancellable operating leases are receivable as follows:

The Group and The Company

in HK$ million 2004 2003

Within 1 year 1,156 925 After 1 year but within 5 years 1,742 1,121 Later than 5 years 332 355 3,230 2,401

H In March 2003, the Group entered into a series of structured transactions with unrelated third parties to lease out and lease back certain of its passenger cars (“Lease Transaction”) involving a total original cost of HK$2,562 million and a total net book value of HK$1,674 million as at 31 March 2003. Under the Lease Transaction, the Group has leased the assets to institutional investors in the United States (the “Investors”), who have prepaid all the rentals in relation to the lease agreement. Simultaneously, the Group has leased the assets back from the Investors with obligation to pay rentals in accordance with a pre-determined payment schedule. The Group has an option to purchase the Investors’ leasehold interest in the assets at pre-determined dates for ﬁxed amounts. Part of the rental prepayments received from the Investors has been invested in debt securities to meet the Group’s rental obligations and the amount payable for exercising the purchase option under the Lease Transaction. In addition, the Group retains legal title to the assets and there are no restrictions on the Group’s ability to utilise these assets in the operation of the railway business.

As a result of the Lease Transaction, the Group received total cash of approximately HK$3,688 million and committed to long-term lease payments with an estimated net present value in March 2003 of approximately HK$3,533 million, which have been defeased by purchase of debt securities to meet the payment obligations. The Group received in 2003 the cash amount of HK$141 million net of costs from the Lease Transaction.

As the Group is not able to control the investment account in pursuit of its own objectives and is not obligated to pay the lease payments, those liabilities and investments in debt securities are not recognised as obligations and assets of the Group. The net amount of cash received by the Group has been accounted for as deferred income and is being amortised to the Group’s proﬁt and loss account over the terms of the respective leases. MTR CORPORATION LIMITED ANNUAL REPORT 2004 103

15 Railway construction in progress

The Group and The Company Costs Transferred written off from deferred Expenditure/ to proﬁt and Balance at expenditure (Government loss account Balance at in HK$ million 1 Jan 2004 (Note 17) grant) (Note 4C) 31 Dec 2004

Tseung Kwan O Extension Further Capital Works Project Construction costs 1 – – – 1 Consultancy fees 23 – 7 (29) 1 Staff costs and general expenses 16 – 5 (16) 5 Finance costs 4 – – (4) – 44 – 12 (49) 7 Disneyland Resort Line Project Construction costs 645 – 429 – 1,074 Consultancy fees 41 – 5 – 46 Staff costs and general expenses 194 – 85 – 279 Finance costs 3 – 7 – 10 883 – 526 – 1,409 Government grant (Notes 41E and 41J) (883) – (48) – (931) – – 478 – 478 Tung Chung Cable Car Project Construction costs 82 – 254 – 336 Consultancy fees 24 – 13 – 37 Staff costs and general expenses 29 – 28 – 57 Finance costs 2 – 12 – 14 137 – 307 – 444 AsiaWorld-Expo Station Project Construction costs – – 16 – 16 Staff costs and general expenses – 3 13 – 16 Finance costs – – 1 – 1 – 3 30 – 33 Total 181 3 827 (49) 962

Costs written off to proﬁt and loss account relates to certain station design costs in respect of the future Tseung Kwan O South Station, which became abortive following the submission of a revised station design plan and its approval by the Town Planning Board during the year. 104 Notes to the accounts

16 Property development in progress

Under the Airport Railway Agreement related to the construction of the Airport Railway, the Government had granted to the Company land on ﬁve station sites along the railway at market value for property development. In preparing the sites for development, the Company incurs costs related to foundation and site enabling works and expects the costs to be reimbursed by property developers in the form of up-front cash payments when development packages are awarded. In accordance with the development agreements entered into with property developers, the developers are also responsible for the balance of the development costs.

Notwithstanding having entered into the development agreements with the developers, the Company being the grantee of the land remains primarily responsible for the fulﬁlment of all the conditions and obligations in the Land Grant. Such conditions and obligations include the type and quantity of the developments that must be built, public facilities to be provided, and the completion date of the project.

Costs of foundation and site enabling works incurred by the Company are capitalised as property development in progress and payments received from developers are credited to property development in progress to offset costs incurred in respect of the same development. In cases where payments received from developers exceed the related expenditure incurred by the Company, such excess is recorded as deferred income (note 16B(i)). In these cases, any subsequent expenditure incurred by the Company in respect of that development will be charged against deferred income. Deferred income is to be recognised as proﬁts of the Company at the appropriate time after charging any remaining costs related to foundation and site enabling works, and after taking into account the outstanding risks and obligations retained by the Company relating to each development. Until such time as deferred income is recognised as proﬁt, it is recorded as a liability of the Company in recognition of the Company’s obligations under the Land Grant.

The Tseung Kwan O Extension (“TKE”) Project Agreement entered into in 1998 between the then Secretary for Transport, for and on behalf of the Government, and the Company in respect of the construction of the Tseung Kwan O Extension provides the Company with the right to undertake property developments at four station and depot sites along the Tseung Kwan O Line (“Tseung Kwan O Extension Property Projects”).

A Property development in progress

The Group and The Company Offset against payments received from Transfer out Transfer to Balance at developers on project assets under Balance at in HK$ million 1 Jan Expenditure (Note 16B(i)) completion construction 31 Dec

2004 Airport Railway Property Projects – 116 (39) – (77) – Tseung Kwan O Extension Projects 2,266 66 (2) (287) – 2,043 Other property projects 43 2 – – – 45 2,309 184 (41) (287) (77) 2,088 2003 Airport Railway Property Projects 597 122 (63) (656) – – Tseung Kwan O Extension Projects 2,232 37 (3) – – 2,266 Other property projects 41 2 – – – 43 2,870 161 (66) (656) – 2,309 MTR CORPORATION LIMITED ANNUAL REPORT 2004 105

16 Property development in progress (continued)

B Deferred income on property development

The Group and The Company in HK$ million 2004 2003

Deferred income on property development comprises: – Up-front payments received from developers (Note 16B(i)) 3,414 4,924 – Sharing in kind (Note 16B(ii)) 1,092 – 4,506 4,924

(i) Deferred income on up-front payments

The Group and The Company Offset against property Amount Payments development recognised Balance at Balance at received from in progress as proﬁt 31 Dec in HK$ million 1 Jan developers (Note 16A) (Note 6) (Note 33)

2004 Airport Railway Property Projects 4,917 132 (39) (1,601) 3,409 Tseung Kwan O Extension Property Projects 7 – (2) – 5 4,924 132 (41) (1,601) 3,414 2003 Airport Railway Property Projects 6,216 50 (63) (1,286) 4,917 Tseung Kwan O Extension Property Projects 10 – (3) – 7 6,226 50 (66) (1,286) 4,924

(ii) Deferred income on sharing in kind Under the property development agreement in respect of an Airport Railway development package, the Company received during 2004 the shell of a retail centre at Union Square, Kowloon Station and its car parking spaces as sharing in kind. Part of the property development profit is deferred as the Company has an obligation under the development agreement to complete the fitting-out works. Accordingly, a portion of the fair value of the retail shell equivalent to estimated cost of the outstanding fitting-out works has been withheld as deferred income. On this basis, movements of the deferred income on this sharing in kind during the year are set out below:

The Group and The Company in HK$ million 2004 2003

Balance as at 1 January – – Sharing in kind received from developer 2,100 – Less: Amount recognised as proﬁt (Note 6) (1,008) – Balance as at 31 December 1,092 – 106 Notes to the accounts

16 Property development in progress (continued)

C Stakeholding funds As stakeholder under certain Airport Railway Property Projects, the Company receives and manages deposit monies and sales proceeds in respect of sales of properties under those developments. These monies are placed in separate designated bank accounts and, together with any interest earned, will be released to the developers for the reimbursement of costs of the respective developments in accordance with the terms and conditions of the Government Consent Schemes and development agreements. Accordingly, the balances of the stakeholding funds and the corresponding bank balances have not been included in the Group’s and the Company’s balance sheets. Movements in stakeholding funds during the year were as follows:

The Group and The Company

in HK$ million 2004 2003

Balance as at 1 January 3,572 3,231 Stakeholding funds received and receivable 13,958 13,472 Add: Interest earned thereon 8 25 17,538 16,728 Disbursements during the year (13,474) (13,156) Balance as at 31 December 4,064 3,572 Represented by : Balances in designated bank accounts as at 31 December 4,062 3,570 Retention receivable 2 2 4,064 3,572

17 Deferred expenditure

The Group Transfer Costs to railway Expenditure/ written off construction Discount (Amortisation) to proﬁt and Balance at in progress on bond during loss account Balance at in HK$ million 1 Jan (Note 15) issue the year (Note 4C) 31 Dec

2004 Deferred ﬁnance charges 76 – 50 (17) – 109 Merger studies – – – 56 – 56 Expenditure on proposed capital projects – West Island Line / South Island Line 25 – – 17 (15) 27 – Shenzhen Metro Line 4 Project – – – 51 – 51 – AsiaWorld-Expo Station Project 3 (3) – – – – 104 (3) 50 107 (15) 243 2003 Deferred ﬁnance charges 72 – 10 (6) – 76 Expenditure on proposed capital projects – Tung Chung Cable Car Project17(17)–––– – West Island Line / South Island Line 16 – – 30 (21) 25 – AsiaWorld-Expo Station Project–––3–3 – Other 1 – – – (1) – 106 (17) 10 27 (22) 104 MTR CORPORATION LIMITED ANNUAL REPORT 2004 107

17 Deferred expenditure (continued)

The Company Transfer Costs to railway Expenditure/ written off construction Discount (Amortisation) to proﬁt and Balance at in progress on bond during loss account Balance at in HK$ million 1 Jan (Note 15) issue the year (Note 4C) 31 Dec

2004 Deferred ﬁnance charges 76 – 50 (17) – 109 Merger studies – – – 56 – 56 Expenditure on proposed capital projects – West Island Line / South Island Line 25 – – 17 (15) 27 – AsiaWorld-Expo Station Project 3 (3) – – – – 104 (3) 50 56 (15) 192 2003 Deferred ﬁnance charges 72 – 10 (6) – 76 Expenditure on proposed capital projects – Tung Chung Cable Car Project17(17)–––– – West Island Line / South Island Line 16 – – 30 (21) 25 – AsiaWorld-Expo Station Project–––3–3 – Other 1 – – – (1) – 106 (17) 10 27 (22) 104

Merger studies comprise external consultancy, direct staff costs and expenses in relation to the studies on the potential merger between the Company and Kowloon-Canton Railway Corporation (“KCRC”). On 24 February 2004, the Government announced its decision to invite the Company and KCRC to commence discussions on a possible merger for which a joint proposal was submitted to the Government on 16 September 2004. Concurrent with the submission of the proposal, the Company has been negotiating with the Government on the terms of the possible merger. Presently, the joint merger proposal is being considered by the Government, whilst the Company’s discussion with the Government on the terms of the merger is continuing.

The expenditure incurred on the proposed Shenzhen Metro Line 4 (“Line 4”) Project was capitalised as deferred expenditure following the signing of an Agreement in Principle to construct Phase 2 of Line 4 and to operate Line 4 for a term of 30 years with the Shenzhen Municipal People’s Government in January 2004 (note 42D(i)).

Deferred expenditure relating to the AsiaWorld-Expo Station Project was transferred to Railway Construction in Progress upon signing of the project agreement with Hong Kong IEC Limited in March 2004. 108 Notes to the accounts

18 Interest in non-controlled subsidiary

The Group and the Company had the following interest in a non-controlled subsidiary at 31 December 2004:

The Group The Company in HK$ million 2004 2003 2004 2003

Unlisted shares, at cost – – 24 24 Share of net assets 63 110 – – 63 110 24 24

Interest in equity Issued and paid up shares held by Place of Name of company ordinary share capital the Company incorporation Principal activities

Octopus Cards Limited HK$42,000,000 57.4% Hong Kong Development and operation of smart card system

In June 1994, the Company entered into an agreement with four local transport companies, Kowloon-Canton Railway Corporation, The Kowloon Motor Bus Company (1933) Limited (subsequently replaced by KMB Public Bus Services Holdings Limited), Citybus Limited and The Hongkong and Yaumati Ferry Co., Limited (subsequently replaced by New World First Bus Services Limited and New World First Ferry Services Limited), to incorporate a company, Creative Star Limited, now Octopus Cards Limited (“OCL”), to undertake the development and operation of the “Octopus” contactless smart card ticketing system, which was initially used by the shareholding transport companies. Although the Company holds a majority interest in the issued shares of OCL, its appointees to the Board of Directors of OCL are limited to 49% of the voting rights at board meetings. The shareholders have agreed to provide the necessary funding to OCL for its operations and for the development of the “Octopus” system.

On 20 April 2000, OCL received approval from The Hong Kong Monetary Authority to become a deposit-taking company (“DTC”) for purposes of extending the use of Octopus cards to a wider range of services, including those that are non-transport related. Prior to becoming a DTC, the Octopus card was exempted from the deﬁnition of “multi-purpose card” under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) on the basis that its use was restricted to transport related services only.

On 17 January 2001, the Company entered into a new Shareholders’ Agreement with the other shareholders of OCL. Under this agreement, the Company disposed of a shareholding interest of 10.4% in OCL to certain other shareholders of OCL for a consideration of HK$16 million, together with a deferred consideration to be received in the event of OCL subsequently becoming a stock exchange listed company.

During the year ended 31 December 2004, OCL declared a dividend of HK$150 million out of its retained earnings, of which the Company’s entitlement of HK$86 million has been included in amount due from non-controlled subsidiary. In addition, a total amount of HK$51 million (2003: HK$46 million) was paid by the Company to OCL in respect of the central clearing services provided by OCL to the Company. During the same period, load agent fees and fees for handling Octopus card issuance and refund amounting to HK$10 million (2003: HK$10 million) and HK$6 million (2003: HK$5 million) respectively were received from OCL in respect of services and facilities provided by the Company at various MTR stations.

During the year, services fees amounting to HK$2 million (2003: HK$2 million) were also received from OCL in respect of rental of computer equipment and services and warehouse storage space payable to the Company under a service agreement. MTR CORPORATION LIMITED ANNUAL REPORT 2004 109

18 Interest in non-controlled subsidiary (continued)

The condensed proﬁt and loss account and the balance sheet for OCL are shown below:

Proﬁt and loss account

Year ended 31 December 2004 2003 in HK$ million (Audited) (Audited)

Turnover 207 177 Other operating income 77 62 284 239 Staff costs (66) (54) Load agent fees and bank charges for add value services (41) (31) Other expenses (47) (62) Operating profit before depreciation 130 92 Depreciation (81) (80) Operating profit before interest and finance charges 49 12 Net interest income 28 28 Profit before taxation 77 40 Income tax (8) (1) Profit for the year 69 39 Group’s share of profit before taxation 44 23

Dividend 150 – Group’s share of dividend 86 –

Balance sheet at 31 December 2004 2003 in HK$ million (Audited) (Audited)

Assets Fixed assets 201 243 Investments 993 704 Cash at banks and in hand 259 327 Other assets 101 91 1,554 1,365 Liabilities Card ﬂoats and card deposits due to cardholders (1,208) (1,075) Amounts due to shareholders (167) (22) Other liabilities (68) (76) (1,443) (1,173) Net assets 111 192 Shareholders’ funds Share capital 42 42 Retained proﬁts 69 150 111 192 Group’s share of net assets 63 110 110 Notes to the accounts

19 Investments in subsidiaries

The Company

in HK$ million 2004 2003

Unlisted shares, at cost 185 181 Less: Impairment losses 3 3 182 178

The following list contains details of subsidiaries as at 31 December 2004, other than the non-controlled subsidiary the relevant details of which are disclosed in note 18. All of these are controlled subsidiaries as deﬁned under note 1C and have been consolidated into the Group’s ﬁnancial statements.

Proportion of ownership interest Issued and paid up Group’s Held Place of ordinary/registered effective by the Held by incorporation Name of company share capital interest Company subsidiary and operation Principal activities

Fasttrack Insurance Ltd. HK$77,500,000 100% 100% – Bermuda Insurance underwriting MTR Corporation (C.I.) Limited US$1,000 100% 100% – Cayman Finance Islands MTR Finance Lease (001) Limited * US$1 100% 100% – Cayman Finance Islands MTR Engineering Services Limited HK$1,000 100% 100% – Hong Kong Engineering services MTR Property Agency Co. Limited HK$2 100% 100% – Hong Kong Property agency MTR Travel Limited HK$2,500,000 100% 100% – Hong Kong Travel services MTR China Consultancy HK$1,000 100% 100% – Hong Kong Railway consultancy Company Limited services MTR Consulting (Shenzhen) HK$1,000,000 100% 100% – The People’s Railway consultancy Co. Ltd. Republic services (Incorporated) of China MTR Consultancy (Beijing) HK$1,000,000 100% 100% – The People’s Railway consultancy Co. Ltd. Republic services (Incorporated) of China MTR Corporation (Singapore) S$50,000 100% 100% – Singapore Railway consultancy Pte. Ltd. (Note i) services MTR (Shanghai Project HK$1,000 100% 100% – Hong Kong Railway consultancy Management) Limited services Shanghai Hong Kong Metro HK$15,000,000 60% – 60% The People’s Railway Construction Management Republic construction Co. Ltd. of China management (Incorporated) Candiman Limited * US$1 100% 100% – British Virgin Investment holding Islands MTR Corporation (Shenzhen) HK$100,000,000 100% – 100% The People’s Conduct early-stage Limited Republic preparatory work for (Incorporated) (Note ii) of China Shenzhen Metro Line 4 project MTR China Property Limited HK$1,000 100% 100% – Hong Kong Property management MTR CORPORATION LIMITED ANNUAL REPORT 2004 111

19 Investments in subsidiaries (continued)

Beijing Premier Property US$150,000 60% – 60% The People’s Property Management Co. Ltd. * Republic management (Incorporated) of China Chongqing Premier Property US$150,000 70% – 70% The People’s Property Management Co. Ltd. * Republic management (Incorporated) of China Shenzhen Donghai Anbo RMB3,000,000 51% – 51% The People’s Property Property Management Republic management Co. Ltd. * of China (Incorporated) MTR (Beijing) Property RMB3,000,000 100% 100% – The People’s Property Services Co. Limited * Republic management (Incorporated) of China MTR Telecommunication HK$100,000,000 100% 100% – Hong Kong Radio Company Limited communication services TraxComm Limited HK$15,000,000 100% 100% – Hong Kong Fixed telecommunication network services Rail Sourcing Solutions HK$2 100% 100% – Hong Kong Global railway (International) Limited supply and sourcing services MTR Corporation (UK) Limited * GBP29 100% 100% – United Kingdom Investment holding MTR Corporation (IKF) Limited * GBP29 100% – 100% United Kingdom Investment holding MTR Corporation (No. 2) Limited * GBP1 100% – 100% United Kingdom Investment holding Hong Kong Cable Car Limited * HK$1,000 100% 100% – Hong Kong Dormant Lantau Cable Car Limited * HK$1,000 100% 100% – Hong Kong Dormant MTR (Estates Management) HK$1,000 100% 100% – Hong Kong Dormant Limited * MTR (Shanghai Metro HK$1,000 100% 100% – Hong Kong Dormant Management) Limited *

* Subsidiaries not audited by KPMG. The ﬁnancial statements of the subsidiaries not audited by KPMG reﬂect total net assets and total turnover constituting less than 1% of the respective consolidated totals.

(i) MTR Corporation (Singapore) Pte. Ltd. has been in dormant status since January 2005 and is currently in the process of de-registration.

(ii) The registered share capital of MTR Corporation (Shenzhen) Limited is HK$100 million and is to be paid up in four quarterly instalments of equal amount commencing from 4 March 2004. As of 31 December 2004, HK$75 million of MTR Corporation (Shenzhen) Limited’s registered share capital has been paid up.

(iii) No dividend has been paid or is payable to the Company by the above subsidiaries for the year ended 31 December 2004 (2003: Nil). 112 Notes to the accounts

20 Investments in held-to-maturity securities

Investments in held-to-maturity securities represents debt securities held by an overseas subsidiary for investment purpose and comprising:

The Group

in HK$ million 2004 2003

Held-to-maturity debt securities (All listed overseas): – maturing within 1 year 68 – – maturing after 1 year 134 – 202 – Market value of listed held-to-maturity debt securities 201 –

21 Staff housing loans

The Group and The Company

in HK$ million 2004 2003

Balance at 1 January 67 84 Redemption (13) (9) Repayment (7) (8) Balance at 31 December 47 67

The Group and The Company

in HK$ million 2004 2003

Amounts receivable: – within 1 year 5 7 – after 1 year 42 60 47 67

The MTR Staff Housing Loan Scheme, a Company ﬁnanced scheme, was introduced in 1997 to replace, on a phased basis, the previous arrangements whereby interest subsidies were paid by the Company to eligible employees. All housing loans granted to employees carry interest either at the prevailing Best Lending Rate less 1.75% per annum or at the Company’s Average Cost of Borrowings plus 0.75% per annum, and are secured by mortgage over the relevant properties. MTR CORPORATION LIMITED ANNUAL REPORT 2004 113

22 Properties held for sale

The Group and The Company in HK$ million 2004 2003

Properties held for sale – at cost 597 405 – at net realisable value 218 407 815 812

The properties held for sale at 31 December 2003 and 2004 comprised residential units, retail and car parking spaces at the Olympic Station, Kowloon Station and Hang Hau Station developments. They are properties received by the Company, either as sharing in kind or as part of the proﬁt distribution upon completion of the development (note 6). The properties are stated in the balance sheet at the lower of cost, which is deemed to be their net realisable value upon recognition (note 1I(vii)), or their net realisable value at the balance sheet date. Net realisable value represents the estimated selling price less costs to be incurred in selling the properties. The net realisable values as at 31 December 2003 and 2004 are determined by reference to an open market valuation of the properties as at those dates, undertaken by an independent ﬁrm of surveyors, DTZ Debenham Tie Leung, who have among their staff Members of the Hong Kong Institute of Surveyors.

Properties held for sale at net realisable value are stated net of provision, made in order to state these properties at the lower of their cost and estimated net realisable value. Properties held for sale at year-end included reversal of prior periods’ write-down of inventories to estimated net realisable value, amounting to HK$16 million (2003: write-down of HK$16 million), recognised as an increase in the carrying value of inventories due to a rise in their estimated net realisable value.

23 Stores and spares

The Group and The Company in HK$ million 2004 2003

Stores and spares expected to be consumed: – within 1 year 142 126 – after 1 year 116 136 258 262 Less: Speciﬁc provision for obsolete stock 10 13 248 249

Stores and spares expected to be consumed after 1 year comprise mainly contingency spares and stocks kept to meet cyclical maintenance requirements.

24 Debtors, deposits and payments in advance

The Group The Company in HK$ million 2004 2003 2004 2003

Debtors (net of speciﬁc allowances for bad and doubtful debts), deposits and payments in advance relate to: – Property development projects 282 364 282 364 – Railway operations and other projects 994 789 989 796 1,276 1,153 1,271 1,160

The Group’s credit policy in respect of receivables arising from its principal activities are as follows:

(i) Rentals, advertising and telecommunications fees are billed monthly with due dates ranging from 7 to 50 days. Tenants of the Group’s investment properties and station kiosks are required to pay three months’ rental deposit upon the signing of lease agreements.

(ii) Amounts receivable under interest rate and currency swap agreements with ﬁnancial institutions are due in accordance with the respective terms of the agreements. 114 Notes to the accounts

24 Debtors, deposits and payments in advance (continued)

(iii) Debtors in relation to contracts and capital works entrusted to the Group, subject to any agreed retentions, are due within 21 days upon the certiﬁcation of work in progress.

Fare revenue is collected either in cash for single and two-ride tickets or through Octopus Cards with daily settlement.

The ageing analysis of debtors included above is as follows: The Group The Company in HK$ million 2004 2003 2004 2003

Amounts not yet due 690 775 681 772 Overdue by 30 days 106 67 103 65 Overdue by 60 days 20 16 14 16 Overdue by 90 days 6 9 6 8 Overdue by more than 90 days 70 10 70 9 Total debtors 892 877 874 870 Deposits and payments in advance 286 237 299 251 Prepaid pension costs 98 39 98 39 1,276 1,153 1,271 1,160

As at 31 December 2004, all debtors, deposits and payments in advance were expected to be recovered within one year except for HK$161 million (2003: HK$238 million) included in the amounts relating to railway operations and other projects, which were expected to be recovered after one year.

Included in amounts not yet due are HK$263 million (2003: HK$328 million) receivable from property purchasers, which are due for payment in accordance with the terms of individual agreements on sales and purchases.

25 Amounts due from the Government and other related parties

The Group The Company in HK$ million 2004 2003 2004 2003

Amounts due from: – the Government 36 68 36 68 – the Housing Authority 10 11 10 11 – the Kowloon-Canton Railway Corporation (“KCRC”) – 3 – 3 – non-controlled subsidiary 87 2 87 2 – other subsidiaries of the Company (net of provision for losses) – – 142 91 133 84 275 175

The amount due from the Government relates to outstanding receivable and retention, as well as provision for contract claims recoverable from the Government, in connection with infrastructure works entrusted to the Company.

The amount due from the Housing Authority relates to site formation works entrusted to the Company by the Housing Authority in respect of the Tseung Kwan O Extension Project.

The amount due from KCRC relates to works entrusted to the Company in connection with the provision of interchange stations between the MTR and KCRC systems.

As at 31 December 2004, the contract retentions on the above entrusted works due for release after one year were HK$4 million (2003: HK$6 million). All other amounts due from the Government and other related parties were expected to be received within 12 months. MTR CORPORATION LIMITED ANNUAL REPORT 2004 115

26 Cash and cash equivalents

The Group The Company in HK$ million 2004 2003 2004 2003

Deposits with banks and other ﬁnancial institutions 84 135 84 135 Cash at banks and in hand 185 241 53 40 Cash and cash equivalents in the balance sheet 269 376 137 175 Bank overdrafts (Note 27B) (11) (12) (11) (12) Cash and cash equivalents in the cash ﬂow statement 258 364 126 163

During the year, the Group recognised property development proﬁt out of deferred income and received properties as sharing in kind totalling HK$2,609 million (2003: HK$5,320 million), which were transactions not involving movements of cash or cash equivalents.

27 Loans and obligations under ﬁnance leases

A By type

The Group Exchange (gain)/loss on related forward Balance at year exchange end closing rate contracts Balance Balance in HK$ million 2004 2004 2004 2003

Capital market instruments Listed or publicly traded: US dollar Yankee notes due 2005 2,332 (8) 2,324 2,324 US dollar Global notes due 2009 5,832 2 5,834 5,834 US dollar Global notes due 2010 4,665 14 4,679 4,677 Debt issuance programme notes due 2005 194 – 194 194 Debt issuance programme (Eurobond due 2014) 4,665 (2) 4,663 – 17,688 6 17,694 13,029 Unlisted: Debt issuance programme notes due 2004 to 2019 4,918 – 4,918 6,730 HK dollar notes due 2004 to 2008 1,500 – 1,500 2,350 HK dollar retail bonds due 2004 to 2006 2,250 – 2,250 3,500 8,668 – 8,668 12,580 Total capital market instruments 26,356 6 26,362 25,609 Bank loans and overdrafts 3,649 (26) 3,623 5,911 30,005 (20) 29,985 31,520 Obligations under ﬁnance leases (Note 27C) 393 – 393 505 Total 30,398 (20) 30,378 32,025 116 Notes to the accounts

27 Loans and obligations under ﬁnance leases (continued)

The Company Exchange (gain)/loss on related forward Balance at year exchange end closing rate contracts Balance Balance in HK$ million 2004 2004 2004 2003

Capital market instruments Listed or publicly traded: US dollar Yankee notes due 2005 2,332 (8) 2,324 2,324 US dollar Global notes due 2009 5,832 2 5,834 5,834 US dollar Global notes due 2010 4,665 14 4,679 4,677 Debt issuance programme notes due 2005 194 – 194 194 13,023 8 13,031 13,029 Unlisted: Debt issuance programme notes due 2004 to 2018 667 (2) 665 1,631 667 (2) 665 1,631 Total capital market instruments 13,690 6 13,696 14,660 Bank loans and overdrafts 3,649 (26) 3,623 5,911 17,339 (20) 17,319 20,571 Obligations under ﬁnance leases (Note 27C) 393 – 393 505 Total 17,732 (20) 17,712 21,076

As at 31 December 2004, the Group had available undrawn committed bank loan facilities amounting to HK$5,815 million (2003: HK$6,700 million). In addition, the Group had a number of uncommitted facilities with undrawn amounts totalling HK$10,536 million (2003: HK$12,728 million), comprising a debt issuance programme and short-term bank loan facilities.

B By repayment terms

The Group Capital Bank Obligations market loans and under ﬁnance instruments overdrafts leases Total Total in HK$ million 2004 2004 2004 2004 2003

Long-term loans and obligations under ﬁnance leases Amounts repayable beyond 5 years 13,410 92 – 13,502 14,258 Amounts repayable within a period of between 2 and 5 years 6,334 2,595 141 9,070 8,440 Amounts repayable within a period of between 1 and 2 years 2,450 605 131 3,186 4,512 Amounts repayable within 1 year 4,168 320 121 4,609 4,450 26,362 3,612 393 30,367 31,660 Bank overdrafts – 11 – 11 12 Short-term loans – – – – 353 26,362 3,623 393 30,378 32,025 MTR CORPORATION LIMITED ANNUAL REPORT 2004 117

27 Loans and obligations under ﬁnance leases (continued)

The Company Capital Bank Obligations market loans and under ﬁnance instruments overdrafts leases Total Total in HK$ million 2004 2004 2004 2004 2003

Long-term loans and obligations under ﬁnance leases Amounts repayable beyond 5 years 5,144 92 – 5,236 11,159 Amounts repayable within a period of between 2 and 5 years 5,834 2,595 141 8,570 5,490 Amounts repayable within a period of between 1 and 2 years – 605 131 736 2,912 Amounts repayable within 1 year 2,718 320 121 3,159 1,150 13,696 3,612 393 17,701 20,711 Bank overdrafts – 11 – 11 12 Short-term loans – – – – 353 13,696 3,623 393 17,712 21,076

The amounts repayable within 1 year in respect of long-term loans and obligations under ﬁnance leases are included in long-term loans as these amounts are intended to be reﬁnanced on a long-term basis.

C Obligations under ﬁnance leases As at 31 December 2004, the Group and the Company had obligations under ﬁnance leases repayable as follows:

The Group and The Company Present Interest Present Interest value of the expense Total value of the expense Total minimum relating to minimum minimum relating to minimum lease future lease lease future lease payments periods payments payments periods payments in HK$ million 2004 2004 2004 2003 2003 2003

Amounts repayable within a period of between 2 and 5 years 141 9 150 272 28 300 Amounts repayable within a period of between 1 and 2 years 131 19 150 121 29 150 Amounts repayable within 1 year 121 29 150 112 38 150 393 57 450 505 95 600

Obligations under ﬁnance lease are the Group’s and the Company’s commitments to make future payments to New Hong Kong Tunnel Company Limited under the agreement for the Eastern Harbour Crossing which is treated as a ﬁnance lease (note 14F). 118 Notes to the accounts

27 Loans and obligations under ﬁnance leases (continued)

D Bonds and notes issued and redeemed Bonds and notes issued during the year ended 31 December 2003 and 2004 comprise:

The Group 2004 2003 Net Net Principal consideratio Principal consideration in HK$ million amount received amount received

Debt issuance programme notes 5,158 5,109 3,099 3,091

The above notes were issued by a subsidiary, MTR Corporation (C.I.) Limited. The notes issued are unconditionally and irrevocably guaranteed by the Company; and are direct, unsecured, unconditional and unsubordinated to other unsecured and unsubordinated obligations of MTR Corporation (C.I.) Limited. The obligations of the Company under the guarantee are direct, unsecured, unconditional, and unsubordinated to other unsecured and unsubordinated obligations of the Company. The net proceeds received from the issues were on lent to the Company for general working capital, reﬁnancing or other corporate purposes.

During the year, the Group redeemed HK$4,415 million (2003: HK$500 million) unlisted Hong Kong dollar notes upon maturity.

None of the Group’s listed debt securities was redeemed during the year ended 31 December 2004.

E Guarantees There were no guarantees given by the Government in respect of loan facilities as at 31 December 2004 and 2003.

F Interest rates The total borrowings, excluding obligations under ﬁnance leases, of HK$29,985 million (2003: HK$31,520 million) comprise:

The Group 2004 2003 Loan amount Interest rate Loan amount Interest rate HK$ million % p.a. HK$ million % p.a.

Fixed rate loans and loans swapped to ﬁxed rates 21,959 2.2 – 8.4 19,358 2.2 – 8.4 Variable rate loans and loans swapped from ﬁxed rate 8,026 (Note) 12,162 (Note) 29,985 31,520

The Company 2004 2003 Loan amount Interest rate Loan amount Interest rate HK$ million % p.a. HK$ million % p.a.

Fixed rate loans and loans swapped to ﬁxed rates 9,293 2.2 – 8.4 8,659 2.2 – 8.4 Variable rate loans and loans swapped from ﬁxed rate 8,026 (Note) 11,912 (Note) 17,319 20,571

Note: Interest rates are determined by reference to either the Hong Kong prime rate, the Hong Kong Interbank Offered Rate or the London Interbank Offered Rate. MTR CORPORATION LIMITED ANNUAL REPORT 2004 119

28 Off-balance sheet ﬁnancial instruments

The Group has employed off-balance sheet derivative instruments such as interest rate swaps and currency swaps to manage its interest rate and foreign exchange exposure. These instruments are used solely to reduce or eliminate the ﬁnancial risk associated with the Group’s liabilities and not for trading or speculation purposes.

The contracted notional amounts of derivative instruments outstanding by maturity and type at 31 December 2004 are as follows:

The Group and The Company 2004 2003 Maturing in Less than Over Notional amount in HK$ million 2 years 2-5 years 5 years Total Total

Foreign exchange forwards 402 30 – 432 921 Cross currency and interest rate swaps 2,754 5,896 10,617 19,267 13,379 Interest rate swaps and options 9,950 2,527 2,246 14,723 20,571 13,106 8,453 12,863 34,422 34,871

There are four main categories of risk related to using derivative instruments, namely market risk, credit risk, operational risk and legal risk. Since the Group’s policy is to employ derivative instruments purely for hedging purposes, it is not exposed to market risk because any change in market values will be offset by an opposite change in the market values of the underlying liabilities being hedged.

The Group manages credit risk by assigning limits to counter-parties and by dealing only with ﬁnancial institutions with acceptable credit ratings. The Group further monitors its credit exposure by estimating the fair market values plus any potential adverse movement in the values of the derivative instruments employed. The Group has not experienced non-performance by any counter-party.

The Group has internal control measures designed to safeguard compliance with policies and procedures to minimise operational risk. Standardised or master agreements are used whenever practicable to reduce legal risk and credit exposure.

29 Creditors, accrued charges and provisions

The Group The Company in HK$ million 2004 2003 2004 2003

Creditors, accrued charges and provisions – Airport Railway Project 89 242 89 242 – Tseung Kwan O Extension Project 223 256 223 256 – Property Projects 483 359 483 359 – Railway operations and other projects 2,192 2,495 1,960 2,408 Gross amount due to customers for contract work 47 68 – 7 3,034 3,420 2,755 3,272

The above amounts are mainly related to capital projects which are settled upon certiﬁcation of work in progress and swap interest payable. The Group has no signiﬁcant balances of trade creditors resulting from its provision of transportation services.

The aggregate amount of costs incurred plus recognised proﬁts less recognised losses to date, included in the gross amount due to customers for contract work at 31 December 2004, is HK$58 million (2003: HK$121 million).

The gross amount due to customers for contract work at 31 December 2004 that is expected to be settled after more than one year is HK$47 million (2003: HK$56 million). 120 Notes to the accounts

29 Creditors, accrued charges and provisions (continued)

The analysis of creditors included above by due dates is as follows:

The Group The Company in HK$ million 2004 2003 2004 2003

Due within 30 days or on demand 563 541 414 516 Due after 30 days but within 60 days 509 590 474 559 Due after 60 days but within 90 days 106 75 105 74 Due after 90 days 1,356 1,767 1,262 1,681 2,534 2,973 2,255 2,830 Rental and other refundable deposits 369 297 369 292 Accrued employee beneﬁts 131 150 131 150 Total 3,034 3,420 2,755 3,272

Creditors, accrued charges and provisions in respect of the capital projects and other construction works include provisions for claims on completed contracts, which were capitalised as part of the related assets. Most of these claims have been resolved and it is anticipated that, subject to unforeseen circumstances, the remaining amount required to be paid will be sufﬁciently covered by the above mentioned provisions of the respective projects. The carrying amounts of such claim provisions and their movements are not separately disclosed in view of their commercial sensitivity.

As at 31 December 2004, all creditors, accrued charges and provisions were expected to be settled within one year except for HK$529 million (2003: HK$729 million) included in the amounts relating to railway operations and other projects, which were expected to be settled after one year. The amounts due after one year are mainly rental deposits received from shop and station kiosk tenants and advance income received from telecommunication services operators.

30 Contract retentions

The Group and The Company Due for Due for release after release within in HK$ million 12 months 12 months Total

2004 Tseung Kwan O Extension Project – 41 41 Property Projects – – – Railway operations and other projects 71 128 199 71 169 240 2003 Tseung Kwan O Extension Project – 99 99 Property Projects – 9 9 Railway operations and other projects 89 114 203 89 222 311 MTR CORPORATION LIMITED ANNUAL REPORT 2004 121

31 Amounts due to the Government and other related parties

The following are amounts due to the Government and Airport Authority in respect of works entrusted to them by the Group and the amounts due to the subsidiaries:

The Group The Company in HK$ million 2004 2003 2004 2003

Amounts due to: – the Government – 113 – 113 – the Airport Authority – 48 – 48 – KCRC 1 – 1 – – the Company’s subsidiaries – – 12,870 11,074 1 161 12,871 11,235

As at 31 December 2004, HK$1 million (2003: HK$100 million) due to the Government, Airport Authority and KCRC and HK$205 million (2003: HK$125 million) due to the subsidiaries are expected to be settled within one year.

The majority of the amounts due to the Company’s subsidiaries relate to amount due to a subsidiary, MTR Corporation (C.I.) Limited, in respect of proceeds from bonds and notes issued by the subsidiary which were on-lent to the Company for its general corporate purposes (note 27D).

32 Deferred liabilities

The Group and The Company in HK$ million 2004 2003

Estate management funds – Refundable deposits on managed properties 50 33 – Building maintenance and asset replacement reserve funds 59 53 109 86

33 Deferred income

The Group and The Company in HK$ million 2004 2003

Deferred income on property development (Note 16B) 4,506 4,924 Deferred income on lease out and lease back transaction (Note 14H) 137 141 Less: Amount recognised as income 5 4 132 137 4,638 5,061 122 Notes to the accounts

34 Income tax in the balance sheet

A Current taxation in the consolidated balance sheet comprised overseas tax liabilities in respect of consultancy services income earned offshore, chargeable at the appropriate current tax rates of taxation ruling in the relevant countries.

B Deferred tax assets and liabilities recognised The components of deferred tax assets and liabilities recognised in the balance sheet and the movements during the year are as follows:

The Group Deferred tax arising from Depreciation Provision allowances in and other excess of related Revaluation temporary in HK$ million depreciation of properties differences Tax losses Total

2004 At 1 January 2004 8,753 4 (111) (4,646) 4,000 Charged/(credited) to consolidated proﬁt and loss account 270 – (20) 441 691 Charged to reserves (Note 36) – 58 – – 58 At 31 December 2004 9,023 62 (131) (4,205) 4,749 2003 At 1 January 2003 7,684 – (83) (4,349) 3,252 Charged/(credited) to consolidated proﬁt and loss account 1,069 – (28) (297) 744 Charged to reserves (Note 36) – 4 – – 4 At 31 December 2003 8,753 4 (111) (4,646) 4,000

The Company Deferred tax arising from Depreciation Provision allowances in and other excess of related Revaluation temporary in HK$ million depreciation of properties differences Tax losses Total

2004 At 1 January 2004 8,753 4 (111) (4,646) 4,000 Charged/(credited) to proﬁt and loss account 259 – (20) 467 706 Charged to reserves (Note 36) – 58 – – 58 At 31 December 2004 9,012 62 (131) (4,179) 4,764 2003 At 1 January 2003 7,684 – (83) (4,349) 3,252 Charged/(credited) to proﬁt and loss account 1,069 – (28) (297) 744 Charged to reserves (Note 36) – 4 – – 4 At 31 December 2003 8,753 4 (111) (4,646) 4,000 MTR CORPORATION LIMITED ANNUAL REPORT 2004 123

34 Income tax in the balance sheet (continued)

The Group The Company in HK$ million 2004 2003 2004 2003

Net deferred tax asset recognised in the balance sheet (15) – – – Net deferred tax liability recognised in the balance sheet 4,764 4,000 4,764 4,000 4,749 4,000 4,764 4,000

35 Share capital, share premium and capital reserve in HK$ million 2004 2003

Authorised: 6,500,000,000 shares of HK$1.00 each 6,500 6,500 Issued and fully paid: 5,389,999,974 shares (2003: 5,288,695,393 shares) of HK$1.00 each 5,390 5,289 Share premium 3,691 2,609 Capital reserve 27,188 27,188 36,269 35,086

Pursuant to the Articles of Association of the Company, the capital reserve can only be applied in paying up in full unissued shares to be allotted and distributed as fully paid bonus shares to the shareholders of the Company.

Share premium represents the amount by which the issue price of shares exceeds the par value of those shares. The application of the share premium account is governed by section 48B of the Hong Kong Companies Ordinance.

New shares issued and fully paid up during the year comprise:

Proceeds credited to Number of Option/ Share capital Share premium shares scrip price account account Total HK$ HK$ million HK$ million HK$ million

Employee share options exercised 8,023,500 8.44 8 60 68 Issued as 2003 ﬁnal scrip dividends 62,069,342 11.93 62 678 740 Issued as 2004 interim scrip dividends 31,211,739 12.00 31 344 375 101,304,581 101 1,082 1,183

Outstanding share options under the Pre-Global Offering Share Option Scheme and New Joiners Share Option Scheme as at 31 December 2004 are disclosed in note 43. 124 Notes to the accounts

36 Other reserves

The Group Investment Fixed property asset revaluation revaluation Retained in HK$ million reserve reserve proﬁts Total

2004 Balance as at 1 January 2004 6,682 18 15,506 22,206 Dividends paid – – (2,231) (2,231) Surplus on revaluation, net of deferred tax (Notes 14 and 34) 2,486 273 – 2,759 Profit for the year – – 4,496 4,496 Balance as at 31 December 2004 9,168 291 17,771 27,230 2003 Balance as at 1 January 2003 6,406 24 13,234 19,664 Dividends paid – – (2,178) (2,178) Surplus/(Deficits) on revaluation, net of deferred tax 276 (6) – 270 Profit for the year – – 4,450 4,450 Balance as at 31 December 2003 6,682 18 15,506 22,206

The Company Investment Fixed property asset revaluation revaluation Retained in HK$ million reserve reserve proﬁts Total

2004 Balance as at 1 January 2004 6,682 18 15,305 22,005 Dividends paid – – (2,231) (2,231) Surplus on revaluation, net of deferred tax (Notes 14 and 34) 2,486 273 – 2,759 Profit for the year – – 4,479 4,479 Balance as at 31 December 2004 9,168 291 17,553 27,012 2003 Balance as at 1 January 2003 6,406 24 13,104 19,534 Dividends paid – – (2,178) (2,178) Surplus/(Deficits) on revaluation, net of deferred tax 276 (6) – 270 Profit for the year – – 4,379 4,379 Balance as at 31 December 2003 6,682 18 15,305 22,005

The investment property and fixed asset revaluation reserves were set up to deal with the surpluses or deficits arising from the revaluation of investment properties and self-occupied office land and buildings respectively (note 1E).

The investment property and ﬁxed asset revaluation reserves are not available for distribution to shareholders because they do not constitute realised proﬁts. As at 31 December 2004, the total amount of reserves available for distribution to shareholders under the Hong Kong Companies Ordinance amounted to HK$17,553 million (2003: HK$15,305 million).

Included in the Group’s retained proﬁts as at 31 December 2004 is an amount of HK$39 million (2003: HK$86 million), being the retained proﬁts attributable to the non-controlled subsidiary. MTR CORPORATION LIMITED ANNUAL REPORT 2004 125

37 Retirement Schemes

The Company operates two occupational retirement schemes, the MTR Corporation Limited Retirement Scheme (the “Retirement Scheme”) and a top-up scheme, the MTR Corporation Limited Retention Bonus Scheme (the “RBS”). In addition, in accordance with the Mandatory Provident Fund (“MPF”) Schemes Ordinance, the Company has set up an MPF Scheme on 1 December 2000 by participating in a master trust scheme provided by an independent MPF service provider. Employees eligible to join the Retirement Scheme can choose between the Retirement Scheme and the MPF Scheme while temporary employees are required to join the MPF Scheme.

The assets of these schemes are held under the terms of separate trust arrangements so that the assets are kept separate from those of the Company.

A Retirement Scheme The Retirement Scheme was established under trust at the beginning of 1977. The Retirement Scheme contains both defined benefit and defined contribution elements. The Retirement Scheme was registered under the Occupational Retirement Schemes Ordinance (Chapter 426 of the Laws of Hong Kong) (“ORSO”) with effect from 31 October 1994. On 3 July 2000, exemption was granted by the MPF Authority to maintain the Retirement Scheme and offer it as an alternative to the MPF Scheme.

The Retirement Scheme provides both a hybrid benefit section and a defined contribution benefit section, offering benefits on retirement, permanent disability, death and leaving service to its members. The hybrid benefit section provides benefits based on the greater of a multiple of final salary and accumulated contributions with investment returns. The defined contribution benefit section, which was implemented on 1 April 1999, is a member choice plan which provides retirement benefits based on accumulated contributions and investment returns only. Promotees who are promoted after 1 April 1999 can choose to join either the defined contribution benefit section or to remain in the hybrid benefit section. As the hybrid benefit section was closed to new entrants on 31 March 1999, staff joining the Company on or after 1 April 1999 who would be eligible to join the Retirement Scheme can choose to join either the defined contribution benefit section or, commencing 1 December 2000, the MPF Scheme.

(a) The hybrid benefit section Members’ contributions to the hybrid benefit section are based on a fixed percentage of basic salary. The Company’s contributions are determined by the Executive Directorate with reference to an actuarial valuation. At 31 December 2004, the total membership was 5,966 (2003: 6,093). In 2004, members contributed HK$67 million (2003: HK$70 million) and the Company contributed HK$224 million (2003: HK$238 million) to the hybrid benefit section. The net asset value of the hybrid benefit section as at 31 December 2004 was HK$5,365 million (2003: HK$4,639 million).

(b) The defined contribution benefit section Both members’ and the Company’s contributions to the defined contribution benefit section are based on fixed percentages of members’ basic salary. As at 31 December 2004, the total membership under this section was 406 (2003: 405). In 2004, total members’ contributions were HK$6.4 million (2003: HK$5.3 million) and the total contribution from the Company was HK$13.3 million (2003: HK$11.1 million). The net asset value as at 31 December 2004 was HK$74.8 million (2003: HK$49.5 million).

According to the terms of the trust deed, forfeitures were transferred to the reserve account to be utilised at the discretion of the Company. 126 Notes to the accounts

37 Retirement Schemes (continued)

(c) Actuarial valuations Actuarial valuations are carried out annually in accordance with the ORSO. A full actuarial valuation of the Retirement Scheme, comprising both the hybrid and the defined contribution benefit sections, was carried out at 31 December 2004 by Towers, Perrin, Forster & Crosby, Inc., an independent firm of consulting actuaries, using the Attained Age Method. The principal actuarial assumptions used included a long-term rate of investment return net of salary increases of 2.0% (2003: 2.0%) per annum, together with appropriate allowances for expected rates of mortality, turnover, redundancy and retirement and an adjustment for salary increases expected over the short term. The actuary confirmed that, at the valuation date:

(i) the Scheme was solvent, with assets more than adequate to cover the aggregate value of members’ vested beneﬁts had all members left the Scheme; and

(ii) the value of the Scheme’s assets was more than sufﬁcient to cover the aggregate past service liability on the assumption that the Scheme continued in force.

B RBS The RBS was established under trust as of 1 January 1995. The RBS is a defined benefit scheme and applies to all employees classified by the Company as staff working on designated projects and who are not on gratuity terms. The RBS provides for benefits to be payable only in the event of redundancy for accrued service up to 31 December 2002. The RBS was registered under the Occupational Retirement Schemes Ordinance with effect from 1 December 1995. As at 31 December 2004, there were 397 members (2003: 424) under the RBS.

The RBS is non-contributory for members. The Company’s contributions are determined by the Executive Directorate with reference to an actuarial valuation and are charged as part of the staff costs to various projects on the basis of the amount contributed. During 2004, the Company’s contributions amounted to HK$2 million (2003: HK$2 million). The net asset value of the RBS as at 31 December 2004 was HK$14 million (2003: HK$14 million).

Actuarial valuations are carried out annually. A full actuarial valuation of the RBS was carried out at 31 December 2004 by Towers, Perrin, Forster & Crosby, Inc. using the Attained Age Method. The principal actuarial assumptions used included an expected weighted rate of investment return net of salary increases, of approximately -1.25% (2003: 0%) per annum, together with appropriate allowance for expected rates of redundancy. The actuary conﬁrmed that, at the valuation date:

(i) due to the nature of the RBS which provides for beneﬁts only on redundancy, there was no aggregate vested liability, and thus the RBS was technically solvent; and

(ii) the value of the RBS assets, together with the future contributions recommended by the actuary and to be adopted by the Company, would be sufﬁcient to meet the liabilities of the RBS on an on-going basis.

C MPF Scheme Effective from the MPF commencement date of 1 December 2000, the Company joined The Bank Consortium MPF Plan which has been registered with the Mandatory Provident Fund Schemes Authority and authorised by the Securities and Futures Commission. As at 31 December 2004, the total number of employees of the Company participating in the MPF Scheme was 478 (2003: 504). In 2004, total members’ contributions were HK$1.6 million (2003: HK$1.7 million) and total contribution from the Company was HK$2.5 million (2003: HK$2.0 million). MTR CORPORATION LIMITED ANNUAL REPORT 2004 127

38 Deﬁned beneﬁt retirement plan obligations

The Group makes contributions to two defined benefit plans that provide benefits for employees upon retirement or termination of services for other reasons (note 37). The movements in respect of these defined benefit plans during the year are summarised as follows:

A The amounts recognised in the balance sheets:

The Group and The Company Retirement Retirement Scheme RBS Total Scheme RBS Total in HK$ million 2004 2004 2004 2003 2003 2003

Present value of funded obligations 5,456 7 5,463 4,277 14 4,291 Fair value of plan assets (5,365) (14) (5,379) (4,638) (14) (4,652) Net unrecognised actuarial gains/(losses) (188) 6 (182) 322 2 324 Net (asset)/liability (97) (1) (98) (39) 2 (37)

The plans had no investment in shares or debt securities issued by the Company.

B Movements in the net (asset)/liability recognised in the balance sheets:

The Group and The Company Retirement Retirement Scheme RBS Total Scheme RBS Total in HK$ million 2004 2004 2004 2003 2003 2003

At 1 January (39) 2 (37) 123 Contributions paid to the Schemes (224) (2) (226) (238) (2) (240) Expense recognised (Note 38C) 166 (1) 165 198 2 200 At 31 December (97) (1) (98) (39) 2 (37)

C Expense recognised in the consolidated proﬁt and loss account:

Retirement Retirement Scheme RBS Total Scheme RBS Total in HK$ million 2004 2004 2004 2003 2003 2003

Current service cost 228 – 228 235 – 235 Interest cost 222 1 223 195 1 196 Expected return on plan assets (284) (1) (285) (232) (1) (233) Net actuarial (gain)/loss recognised – (1) (1) –22 Expense recognised (Note 38B) 166 (1) 165 198 2 200 Less: Amount capitalised 28 (1) 27 42 2 44 138 – 138 156 – 156

The retirement expense is recognised under staff costs and related expenses in the consolidated proﬁt and loss account. 128 Notes to the accounts

38 Deﬁned beneﬁt retirement plan obligations (continued)

D Actual gain/(loss) on plan assets

in HK$ million 2004 2003

MTRCL Retirement Scheme 527 791 MTRCL Retention Bonus Scheme – –

E The principal actuarial assumptions used as at 31 December 2004 (expressed as weighted average) are as follows:

Retirement Retirement Scheme RBS Scheme RBS 2004 2004 2003 2003

Discount rate at 31 December 4.25% 1.00% 5.25% 1.25% Expected rate of return on plan assets 6.00% 1.50% 6.00% 1.50% Future salary increases 4.00% 2.75% 4.00% 1.50%

39 Construction projects

A Disneyland Resort Line The Project Agreement between the Government and the Company for the design, construction, ﬁnancing and operation of the Disneyland Resort Line was signed on 24 July 2002.

With the progress made on construction and equipment installation, the project is currently scheduled to complete on target on or before 1 July 2005. It is also currently forecast that the capital cost estimate of the project will not exceed the original budget of HK$2 billion.

At 31 December 2004, the Company had incurred expenditure of HK$1,409 million (2003: HK$883 million) on the project and had authorised outstanding commitments on contracts totalling HK$94 million (2003: HK$446 million) related to the project.

B Tung Chung Cable Car Project The Project Agreement between the Government and the Company for the design, construction, ﬁnancing and operation of the Tung Chung Cable Car Project was signed on 19 November 2003.

The project is currently on programme and is scheduled to be completed and opened for service in early 2006. The capital cost estimate for the project based on the deﬁned scope of works and programme is currently estimated at HK$1 billion.

At 31 December 2004, the Company had incurred expenditure of HK$444 million (2003: HK$137 million) on the project and had authorised outstanding commitments on contracts totalling HK$367 million (2003: HK$495 million) related to the project.

C AsiaWorld-Expo Station Project The Project Agreement between the Hong Kong IEC Limited and the Company for the design, construction, ﬁnancing and operation of the AsiaWorld-Expo Station Project was signed on 17 March 2004.

Following the Agreement, the Company has carried out certain construction works and target completion is at the end of 2005. It is currently estimated that the Company will contribute approximately HK$0.2 billion to the capital cost of the project.

At 31 December 2004, the Company had incurred expenditure of HK$33 million (2003: HK$3 million included in deferred expenditure) on the project and had authorised outstanding commitments on contracts totalling HK$87 million (2003: Nil) related to the project. MTR CORPORATION LIMITED ANNUAL REPORT 2004 129

40 Interests in jointly controlled operations

The Group has the following jointly controlled operations in respect of its property development projects as at 31 December 2004.

Location/ Total gross Actual or expected date of development package Land use ﬂoor area (sq. m.) completion of construction works *

Hong Kong Station Ofﬁce / Retail / Hotel 415,894 By phases from 1998 – 2005

Kowloon Station Package One Residential 147,547 Completed in 2000 Package Two Residential 210,319 Completed in 2003 Package Three Residential / Cross Border 105,886 2005 Bus Terminus Package Four Residential 128,845 Completed in 2003 Package Five, Six and Seven Residential / Ofﬁce / Retail / 504,350 By phases from 2007 – 2010 Hotel / Serviced Apartment

Olympic Station Package One Residential / Ofﬁce / Retail 309,069 Completed in 2000 Package Two Residential / Retail 268,650 Completed in 2001 Package Three Residential / Kindergarten 104,452 By phases from 2005 – 2006

Tsing Yi Station Residential / Retail 292,795 Completed in 1999

Tung Chung Station Package One Residential / Ofﬁce / Retail / Hotel 361,686 By phases from 1999 – 2005 Package Two Residential / Retail 255,949 By phases from 2002 – 2007 Package Three Residential / Retail 413,154 By phases from 2002 – 2007

Hang Hau Station Residential / Retail 142,152 Completed in 2004

Tiu Keng Leng Station Residential / Retail 253,765 By phases from 2006 – 2007

Tseung Kwan O Station Area 55b Residential / Retail 96,797 2006 Area 57a Residential / Retail 29,642 2005

Choi Hung Park-and-Ride Residential / Retail 21,538 2005

* Completion based on issuance of occupation permit

The Group’s assets held in relation to these joint venture operations include various site foundation works and related staff and overhead costs. The costs incurred by the Group on each development package are set off against any up-front payments received from developers in relation to that development package, and the balance is shown on the balance sheet either as property development in progress or deferred income (note 16) as the case may be. As at 31 December 2004, total property development in progress in respect of these jointly controlled operations was HK$388 million (2003: HK$540 million) and total deferred income was HK$4,506 million (2003: HK$4,924 million).

As the Group is not involved in the ﬁnancing of the construction of the developments, the only ﬁnancial liability in respect of these developments as at 31 December 2004 was HK$265 million (2003: HK$108 million) in respect of accruals related to property enabling works.

During the year ended 31 December 2004, proﬁts of HK$4,568 million (2003: HK$5,369 million) were recognised (note 6). 130 Notes to the accounts

41 Material related party transactions

The Financial Secretary Incorporated, which holds approximately 76% of the Company’s issued share capital on trust for the Government of the Hong Kong SAR, is the majority shareholder of the Company. Transactions between the Group and Government departments, agencies or Government controlled entities, other than those transactions such as the payment of fees, taxes, leases and rates, etc. that arise in the normal dealings between the Government and the Group, are considered to be related party transactions pursuant to SSAP 20 “Related party disclosures” and are identiﬁed separately in these accounts.

Members of the Board and Members of the Executive Directorate, and parties related to them, are also considered to be related parties of the Group. Transactions with these parties, except for those involving a Member of the Board or his related parties where the relevant Member abstains from voting, are separately disclosed in the accounts.

Major related party transactions entered into by the Group in prior years which are still relevant for the current year include:

A The Company entered into the Airport Railway Agreement with the Government on 5 July 1995 for the construction of the Airport Railway. In addition to specifying the parameters for the design, construction and operation of the Tung Chung and Airport Express Lines, the Agreement also included provisions for the granting of land to the Company for property development (note 16).

B The Company entered into the TKE Project Agreement with the Government on 4 November 1998 for the design, construction, ﬁnancing and operation of the Tseung Kwan O Extension and the granting of land for commercial and residential property developments along the railway extension.

C On 30 June 2000, the Appointed Day for the purposes of the Mass Transit Railway Ordinance, the Company was granted a franchise, for an initial period of 50 years, to operate the existing mass transit railway, and to operate and construct any extension to the railway. On the same day, the Company entered into an Operating Agreement with the Government which detailed provisions for the design, construction, maintenance and operation of the railway under the franchise. The Government has also acknowledged in the Operating Agreement that the Company will require an appropriate commercial rate of return on its investment in any new railway project (which would ordinarily be between 1% to 3% above the estimated weighted average cost of capital of the Company) and that ﬁnancial and other support from the Government may be required.

D On 14 July 2000, the Company received a comfort letter from the Government pursuant to which Government agreed to extend the period of certain of the Company’s land interests so that they are coterminous with the Company’s initial 50-year franchise.

E On 24 July 2002, the Company entered into an agreement with the Government specifying the parameters for the design, construction, financing and operation of the Disneyland Resort Line (the “DRL Agreement”). In connection with the financing of the DRL Project, the Government agreed to provide financial support to the Company in order to bridge the funding gap between the Company’s required rate of return of 11.25% per annum in respect of the DRL Project, and the projected return of the DRL pursuant to the terms of the Operating Agreement (note 41C). Such financial support, which amounted to HK$798 million at net present value on 1 January 2002, has been provided through the Government waivers of its entitlement to cash dividends in respect of its shareholding, commencing from the financial year ended 31 December 2002 and thereafter as is equivalent to the funding gap. Such financial support has been paid-up following Government’s waiver of HK$37 million in respect of the final dividend for the financial year ended 31 December 2003 in this year (note 41J). MTR CORPORATION LIMITED ANNUAL REPORT 2004 131

41 Material related party transactions (continued)

F On 19 November 2003, the Company entered into a formal project agreement with the Government to develop, on a build, operate and transfer basis, the Tung Chung Cable Car System together with a Theme Village at Ngong Ping on the Lantau Island under a franchise granted by the Government for a period of 30 years commencing on 24 December 2003. Details of the project are set out in note 39B.

During the year, the Group has had the following material related party transactions:

G In connection with the construction of various railway projects, certain essential project works are embedded within the infrastructure works to be undertaken by the Government or certain of its related parties. These works have been entrusted to the Government and its related parties and are payable on an actual cost basis according to architectural certiﬁcations. The Government and certain of its related parties, on the other hand, have entered into entrustment agreements with the Company for the construction of various other infrastructure works that are also reimbursable according to actual costs certiﬁed. Details of the amounts paid and the amounts receivable and payable as at 31 December 2004 are provided in notes 15, 25 and 31 respectively.

H The Company has business transactions with its non-controlled subsidiary in the normal course of operations, details of which are disclosed in note 18.

I The Group has paid remuneration to the Members of the Board and Members of the Executive Directorate. Details of these transactions are described in note 5A. In addition, the Members of the Executive Directorate were granted share options under the Company’s Pre-Global Offering Share Option Scheme and New Joiners Share Option Scheme. Details of these directors’ options are disclosed in note 5B and under the paragraph “Board Members and Executive Directorate’s interests in shares” in the Report of the Members of the Board.

J During the year, the following dividends were paid to or waived by the Government: in HK$ million 2004 2003

Cash dividends paid 652 – Cash dividends waived (Note 41E) 37 675 Shares allotted in respect of scrip dividends 1,014 986 1,703 1,661

During the year, HK$37 million (2003: HK$675 million) cash dividends were waived by the Government. Such amount (2003: HK$664 million), together with HK$11 million (2003: Nil) brought forward from previous year, have been offset against the construction costs of the DRL Project (note 15). 132 Notes to the accounts

42 Commitments

A Capital commitments (i) Outstanding capital commitments as at 31 December 2004 not provided for in the accounts were as follows:

The Group and The Company Railway Property Railway extension development in HK$ million operations projects projects Total

2004 Authorised but not yet contracted for 518 – 1,762 2,280 Authorised and contracted for 927 558 213 1,698 1,445 558 1,975 3,978 2003 Authorised but not yet contracted for 470 – 1,817 2,287 Authorised and contracted for 892 941 70 1,903 1,362 941 1,887 4,190

Included in the amounts authorised but not yet contracted for are costs that will not be subject to capital contracts such as staff costs, overhead expenses and capitalised interest.

(ii) The commitments under railway operations comprise the following:

The Group and The Company Improvement Acquisition and of property, enhancement plant and in HK$ million works equipment Total

2004 Authorised but not yet contracted for 388 130 518 Authorised and contracted for 232 695 927 620 825 1,445 2003 Authorised but not yet contracted for 348 122 470 Authorised and contracted for 394 498 892 742 620 1,362

(iii) Commitments in respect of jointly controlled operations have been included in the commitments for property development projects above and were as follows:

The Group and The Company

in HK$ million 2004 2003

Authorised but not yet contracted for 1,762 1,817 Authorised and contracted for 204 61 1,966 1,878 MTR CORPORATION LIMITED ANNUAL REPORT 2004 133

42 Commitments (continued)

B Operating lease commitments The Group had operating leases on ofﬁce buildings and staff quarters as at 31 December 2004. The total future minimum lease payments under non-cancellable operating leases are payable as follows:

The Group and The Company in HK$ million 2004 2003

Payable within one year Leases expiring within one year 5 3 Leases expiring between one to ﬁve years 2 3 7 6 Payable after one but within ﬁve years 1 1 8 7

The above includes HK$2 million (2003: HK$3 million) in respect of the ofﬁce accommodation and quarters for construction project staff. The majority of the leases are subject to rent reviews.

C Liabilities and commitments in respect of property management contracts The Group has, over the years, jointly developed with outside property developers certain properties above or adjacent to railway depots and stations. Under most of the development agreements, the Group retained the right to manage these properties after their completion. The Group, as manager of these properties, enters into services contracts with outside contractors for the provision of security, cleaning, maintenance and other services on behalf of the managed properties. The Group is primarily responsible for these contracts, but any contract costs incurred will be reimbursed by the owners and tenants of the managed properties from the management funds as soon as they are paid.

As at 31 December 2004, the Group had total outstanding liabilities and contractual commitments of HK$613 million (2003: HK$490 million) in respect of these works and services. Cash funds totalling HK$665 million (2003: HK$568 million) obtained through monthly payments of management service charges from the managed properties are held by the Group on behalf of those properties for settlement of works and services provided.

D Investments in China (i) Investment in Line 4 of Shenzhen Metro System (“Shenzhen Line 4”) In January 2004, the Company entered into an Agreement in Principle for a Build-Operate-Transfer (“BOT”) project with the Shenzhen Municipal People’s Government in respect of the construction of Phase 2 of Shenzhen Line 4 of the proposed Shenzhen Metro System and the operation of the entire line for a term of 30 years. The project is subject to a Concession Agreement with the Shenzhen Municipal People’s Government and the necessary government approvals, including that from the Central Government.

Shenzhen Line 4 is a 21-kilometre urban railway running from Huanggang to Longhua New Town in Shenzhen, forming the major north-south railway corridor of the Shenzhen Special Economic Zone. Phase 2 of Shenzhen Line 4 is targeted to complete in late 2008 and upon completion, both Phases 1 and 2 will be operated by the Company’s subsidiary established in Shenzhen. Total investment of the project is estimated at RMB 6 billion (HK$5.66 billion) which will be ﬁnanced by equity capital of RMB 2.4 billion (HK$2.26 billion) and the balance by non-recourse bank loans in RMB. The project will be implemented with associated property developments comprising 2.9 million square metres of commercial and residential space along the railway.

As of 31 December 2004, total costs of HK$51 million (2003: Nil) incurred for the project have been included in deferred expenditure and the Company had further commitment on contracts totalling HK$10 million (2003: Nil) in relation to this project. 134 Notes to the accounts

42 Commitments (continued)

(ii) Investment in Beijing Metro Line 4 Project (“Beijing Line 4”) In December, an Agreement in Principle was entered into between the Company, Beijing Infrastructure Investment Co Ltd. (“BIIC”) and Beijing Capital Group (“BCG”), both are subsidiaries of the Beijing Municipal People’s Government, to form a Public-Private-Partnership company (“PPP”) for the investment in the Beijing Line 4 project, which involves the investment, construction and operation of the line for a term of 30 years. The project is subject to a Concession Agreement with the Beijing Municipal People’s Government and approval from the Central Government.

Beijing Metro Line 4 project is a 29-kilometre new underground metro line running from Majialou Station to Longbeicun Station, forming a main north-south trafﬁc artery of Beijing. The total investment for the Beijing Line 4 project is about RMB 15.3 billion (HK$14.4 billion), 70% of which will be funded by the Beijing Municipal People’s Government. The PPP’s investment will be approximately RMB 5 billion (HK$4.7 billion), contributing to approximately one-third of the total investment in the project. Both the Company and BCG will each own 49% of the PPP whilst BIIC will own the remaining 2% interest. The PPP has a registered capital of approximately RMB 1.5 billion (HK$1.42 billion), about RMB 735 million (HK$693 million) of which will be owned by the Company. The remaining two-thirds of the PPP’s investment is expected to be funded by non-recourse bank loans.

43 Employee Share Option Schemes

A Pre-Global Offering Share Option Scheme In connection with the Initial Public Offering (“IPO”) and Stock Exchange listing of the Company’s shares in October 2000, a Pre- Global Offering Share Option Scheme (“Pre-IPO Option Scheme”) was established. Under the Pre-IPO Option Scheme, a total of 769 employees including all the Members of the Executive Directorate, except C K Chow and Lincoln K K Leong who were appointed on 1 December 2003 and 1 February 2002 respectively, were granted on 20 September 2000 options to purchase an aggregate of 48,338,000 shares, representing 0.9% of the issued share capital of the Company as at 31 December 2004. The options carry an exercise price of HK$8.44 per share, which was equivalent to 90% of the IPO offer price of HK$9.38 per share. The options may be exercised prior to 11 September 2010, subject to the vesting provisions under the Scheme. As of 31 December 2004, all options granted under the Pre-IPO Option Scheme have been vested.

In 2004, no options were vested and a total of 8,023,500 previously vested share options have been exercised. The weighted average closing price in respect of the share options exercised during the year was HK$12.09 per share. In addition, no share options lapsed as a result of the resignation of option holders during the year. As at 31 December 2004, total options to subscribe for 17,206,000 (2003: 25,229,500) shares remained outstanding.

B New Joiners Share Option Scheme In May 2002, the New Joiners Share Option Scheme (the “New Option Scheme”) was adopted at the 2002 Annual General Meeting to provide share options to new members of the top and senior management of the Company who did not participate in the Pre-IPO Option Scheme. Under the Rules of the New Option Scheme, a maximum of 5,056,431 shares, which represent 0.1% of the issued share capital of the Company as at 31 December 2004, may be issued pursuant to the exercise of options granted under the New Option Scheme. Options granted will be evenly vested in respect of their underlying shares over a period of three years from the date on which the relevant option is offered. The exercise price of any option granted under the New Option Scheme is to be determined by the Company upon the offer of grant of the option and which should not be less than the greatest of (i) the average closing price of an MTR share for the ﬁve business days immediately preceding the day of offer of such option; (ii) the closing price of an MTR share on the day of offer of such option, which must be a business day; and (iii) the nominal value of an MTR share.

On 1 August 2003, a total of 5 employees, including Lincoln K K Leong, a Member of the Executive Directorate, were granted options to purchase an aggregate of 1,561,200 shares at an exercise price of HK$9.75 per share, being the closing price of an MTR share on the day of offer. The options are exercisable on or prior to 14 July 2013.

In 2004, 521,000 options to subscribe for shares were vested. However, none of the share options vested so far have been exercised and no share options lapsed during the year. As at 31 December 2004, total options to subscribe for 1,561,200 (2003: 1,561,200) shares remained outstanding. MTR CORPORATION LIMITED ANNUAL REPORT 2004 135

44 Subsequent events A On 24 January 2005, the Company accepted an offer from the Government to allow the Company to proceed with the proposed development on Site F of Tseung Kwan O Town Lot No. 70, Area 86, at an assessed land premium of HK$2,319 million together with other ancillary terms and conditions as specified in the modification letter to be entered into between the Company and the Government. On 8 February 2005, a Development Agreement was entered into between the Company and City Investments Limited, a subsidiary of Cheung Kong (Holdings) Ltd. to jointly develop this site under which the Company will pay half of the land premium. The site involves accommodation and facilities with a total gross floor area of not less than 136,540 square metres comprising 2,096 residential flats, a 31,000-square metre home for the aged and about 500 square metres of retail space. The development is expected to be completed in 2008.

B On 7 February 2005, the Company and its PPP partners initialed the Concession Agreement for the Beijing Metro Line 4 project (note 42D(ii)) with the Beijing Municipal People’s Government.

45 Recently issued accounting standards The HKICPA has issued a number of new and revised Hong Kong Financial Reporting Standards and Hong Kong Accounting Standards (“new HKFRSs”) which are effective for accounting periods beginning on or after 1 January 2005. The Group did not apply early adoption of these new HKFRSs to its ﬁnancial statements for the year ended 31 December 2004. However, the Group has been carrying out an assessment of the impact of these new HKFRSs and has so far concluded that the adoption of the revised standards may have signiﬁcant impact to its consolidated accounts as described below:

A Hong Kong Accounting Standard 40 (“HKAS 40”) on investment property The adoption of HKAS 40 would require all revaluation gains or losses of investment properties to be taken directly to the Profit and Loss Account (“P&L”), whereas under the old standards such changes are generally taken to the revaluation reserve account on a portfolio basis. The volatility of property prices therefore could have significant impact on the level and consistency of the Company’s future operating profits.

B Hong Kong Accounting Standards 32 & 39 (“HKASs 32 & 39”) on financial instruments The adoption of HKASs 32 and 39 would require all financial instruments which the Company is using to hedge the interest rate and currency risks of its borrowings to be marked to market, with change in their fair values recognised in the P&L directly. The standard allows the application of hedge accounting, that is, to use the change in fair value of the underlying hedged items to offset this impact. Should there be inefficiency in the hedging relationship to the extent that the opposing impacts do not cancel each other out, there will be a net residual impact to the P&L. Given that hedge efficiency is affected by a number of factors including the nature of the hedging relationship, direction of interest rates and changes in foreign exchange rates, it is difficult to forecast and control this residual impact.

It should be noted, however, that both of these accounting changes are non-cash items and hence do not affect cash ﬂow.

The Group will continue to assess the impact of other new HKFRSs and other changes may be identiﬁed as a result. However, it is not expected that these will have a signiﬁcant impact on the Group’s consolidated accounts.

46 Approval of accounts

The accounts were approved by the Board on 1 March 2005. 136 Unaudited supplementary information for US bond holders

The Group’s financial statements are prepared in accordance with the accounting principles generally accepted applicable in Hong Kong (“HK GAAP”), which differ in certain significant respects from those applicable in the United States (“US GAAP”). The significant differences relate principally to the following items, and the adjustments considered necessary to restate profit (“net income”) and shareholders’ funds (“shareholders’ equity”) in accordance with US GAAP are shown in the tables set out below.

A Revenue recognition on property developments Under HK GAAP, where the Group receives payments from developers at the commencement of the project, profits arising from such payments are recognised when the foundation and site enabling works are complete and acceptable for development, and after taking into account the outstanding risks and obligations, if any, retained by the Group in connection with the development. In addition, under HK GAAP, where the Group receives a distribution of the assets of the development upon completion of construction, profit is recognised based on the fair value of such assets at the time of receipt. Under US GAAP, such profits would be recognised during construction of the property on a percentage-of-completion basis. Accordingly, the balances of debtors and creditors would be increased by HK$243 million and HK$897 million respectively at 31 December 2003 and HK$237 million and HK$1,276 million respectively at 31 December 2004.

B Telford headquarters redevelopment The Group entered into a joint venture agreement with a property developer to redevelop the headquarters building. Under HK GAAP, the redeveloped headquarters building retained by the Group was recorded as an addition of land and buildings at open market value. The shopping centre and cash received from the developer, net of related costs, were recognised as property development proﬁts. Under US GAAP, the redevelopment would be accounted for as a non-monetary transaction, and such redevelopment would be recorded at historical cost with no proﬁt recognition thereon.

C Asset revaluations and depreciation Under HK GAAP, investment properties are stated on the basis of appraised value, and depreciation expense is not provided on such properties. Also under HK GAAP, self-occupied land and buildings are stated at their open market values on the basis of their existing use at the date of revaluation less any subsequent accumulated depreciation. Under US GAAP, such revaluations are not permitted. Accordingly, for the purposes of the reconciliation between HK GAAP and US GAAP, the properties of the Group, which are stated at appraised or open market value, have been restated at historical cost less accumulated depreciation. Depreciation has been based on the historical cost of the properties and the shorter of the unexpired lease term or useful life of 50 years. The approximate gross historical cost of investment properties subject to depreciation under US GAAP, which are not depreciated under HK GAAP, amounted to HK$6,876 million and HK$6,908 million at 31 December 2003 and 2004, respectively.

D Depreciation of certain ﬁxed assets Prior to 1995, under HK GAAP, the historical cost of the Group’s tunnel lining and underground civil structures was not depreciated. Under established industry practice in the United States for similar costs, depreciation is provided for ﬁnancial accounting purposes over extended periods. For US GAAP purposes, the Group has depreciated such costs over a 100-year period.

Effective 1 January 1995, under HK GAAP, the Group re-appraised the estimated useful life of the tunnel lining and underground civil structures. In accordance with such re-appraisal, such costs are being depreciated over the number of years remaining using an original life of 100-year period. Such change in useful life was accounted for prospectively, with no cumulative adjustment recognised in 1995.

In addition, prior to 1995 under HK GAAP, the cost of leasehold land was not amortised based on assumed extensions of the leases. Under US GAAP, the amortisation of the historical cost of leasehold land is provided over the life of the leases, without any consideration of renewals.

Effective 1 January 1995, under HK GAAP, all leasehold land is amortised over the unexpired terms of the leases. This change in accounting policy under HK GAAP was applied prospectively, with no cumulative adjustment recognised in 1995. MTR CORPORATION LIMITED ANNUAL REPORT 2004 137

E Pension costs Under HK GAAP, the provision for the defined benefit element of the MTR Corporation Limited Retirement Scheme (the “Retirement Scheme”) was based on the contributions made to the Retirement Scheme. The adoption of the new Statement of Standard Accounting Practice (“SSAP”) 34 under HK GAAP has resulted in the provisions for deficiency of the Retirement Scheme’s present value of the defined benefit obligations over the fair value of the assets. Such transitional liability was recognised immediately against the opening balance of the retained profits as of 1 January 2002 under HK GAAP. Under US GAAP, the defined benefit element of the Retirement Scheme is recognised as a charge to income over the employees’ approximate service period, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87. SFAS No.87 focuses on the Retirement Scheme’s benefit formula as the basis for determining the benefit earned, and therefore the cost incurred, in each year. The determination of the benefit earned is actuarially determined and includes components for service cost, time value of money, return on plan assets and gains or losses from changes in previous assumptions. The actuarial valuation methods used are different under HK GAAP and US GAAP and so are the pension expenses recognised. As such, the transitional liability of HK$44 million recognised immediately against the opening balance of the retained profits under HK GAAP is reversed under US GAAP. Under US GAAP, the pension cost would be decreased by HK$74 million for the year ended 31 December 2003 and increased by HK$6 million for the year ended 31 December 2004. Accordingly, the prepaid pension cost at 31 December 2003 and 2004 would be adjusted to accrued pension cost of HK$145 million and HK$80 million respectively.

F Income taxes With effect from 1 January 2003, the Group’s accounting policy for the recognition of deferred tax as set out in note 1R is adopted under HK GAAP. The adoption of this policy resulted in a decrease of HK$2,620 million to the balance of the shareholder’s funds as of 1 January 2002. Under US GAAP, full provision is made for all deferred taxes as they arise, except that a valuation allowance is provided on deferred tax assets to the extent that it is not “more likely than not” that such deferred tax assets will be realised. Under US GAAP, “more likely than not” is deﬁned as a likelihood of more than 50 percent.

Since the adoption of the new accounting policy for deferred tax under HK GAAP, the remaining adjustment represents deferred tax liability recognised for temporary differences arising from adjustments to proﬁt for the year under US GAAP.

G Capitalisation of certain costs Under HK GAAP, certain costs of a non-incremental nature are capitalised relative to the Airport Railway Project and other capital projects. Under US GAAP, it is not permissible to capitalise these non-incremental costs. Accordingly, under US GAAP, ﬁxed assets and railway construction in progress would be decreased by HK$1,229 million and HK$29 million respectively at 31 December 2003 and HK$1,210 million and HK$49 million respectively at 31 December 2004. The preponderance of the capitalised costs relating to the capital projects is incremental in nature and accordingly, is properly capitalised under both HK GAAP and US GAAP.

H Interest Under HK GAAP, interest earned on funds obtained by the Group specifically for the construction of the Airport Railway prior to the date of expenditure for such purpose is credited to railway construction in progress related to the Airport Railway, the balance of which was transferred to fixed assets following the commission of the line in 1997. Interest earned for this purpose includes notional interest on funds temporarily applied by the Group for purposes other than related to the construction of the Airport Railway. Under US GAAP, actual interest earned is included in the determination of profit for such period, and notional interest on funds temporarily applied is not recognised.

I Stock based compensation Under HK GAAP, share options granted by the Company and shares granted by the principal shareholder (defined as shareholding larger than 10%) for no consideration to the employees of the Company are not required to be recognised in the profit and loss account of the Company. Under US GAAP, such share options and shares granted are accounted for in accordance with Accounting Principles Board (“APB”) Opinion 25 as contributions to capital with the offsetting charge to the profit and loss account as compensation expense. The compensation expense for the share grants is measured based on the quoted market price of the shares, and in case of share options, the difference between the quoted market price of the shares less the exercise price, at a defined measurement date. The measurement date is the first date on which both the number of shares that an individual employee is entitled to receive and the exercise price are known.

J Others Other adjustments primarily represent the net effect of costs deferred under HK GAAP which are required to be recognised as expenses under US GAAP, and certain anticipated expenses recognised under HK GAAP which are not recognised as expenses under US GAAP until the related goods or services are received or provided. Under US GAAP, deferred liabilities would be decreased by HK$40 million and HK$42 million respectively at 31 December 2003 and 2004. 138 Unaudited supplementary information for US bond holders

K Derivative instruments Under US GAAP, all derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognised in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognised in the profit and loss account when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognised in earnings.

The Group uses derivative instruments to manage exposures to foreign currency and interest rate risks. The Group’s objectives for holding derivatives are to minimise the risks using the most effective methods to eliminate or reduce the impacts of these exposures.

Under HK GAAP, derivative instruments are not required to be recorded on the balance sheet at fair value. Under US GAAP, assets and liabilities would be increased by HK$914 million and HK$1,280 million respectively at 31 December 2003 and HK$434 million and HK$601 million respectively at 31 December 2004.

L Other comprehensive income Under US GAAP, the Group applies the provisions of SFAS No. 130 which requires the reporting of comprehensive income, which represents the change in equity of the Group during a period from transactions and other events and circumstances from nonowner sources. Such presentation is not required under HK GAAP. Other comprehensive income represents such changes in equity that are not included in the determination of net proﬁt or loss. Other comprehensive income and accumulated other comprehensive income balances determined on a US GAAP basis are related solely to the net unrealised gain or loss on qualifying cash ﬂow hedges, net of related income taxes. Such presentation is not required under HK GAAP.

Under US GAAP, other comprehensive income for the years ended 31 December 2003 and 2004 were HK$157 million (HK$130 million after tax) and HK$133 million (HK$110 million after tax) respectively. Accumulated other comprehensive income at 31 December 2003 and 2004 were HK$280 million (HK$231 million after tax) and HK$147 million (HK$121 million after tax) respectively.

M Lease out and lease back transaction Under HK GAAP, where commitments by the Group to make long-term lease payments have been defeased by the placement of securities under the lease out and lease back transaction as described in note 14H, those commitments and securities are not recognised as obligations and assets of the Group, respectively. Under US GAAP, the securities are not allowed to offset with the commitments to make long-term lease payments as there is no legal right of offset. Accordingly, the securities placed to defease the lease obligations and the related commitments to make long-term lease payments would be reﬂected separately in the balance sheet and the net cash provided by ﬁnancing activities and net cash used by investing activities would be increased by HK$3,781 million under US GAAP.

N Classiﬁcation of items in the consolidated balance sheet Under HK GAAP, amount due from non-controlled subsidiary, amounting to HK$2 million and HK$87 million at 31 December 2003 and 2004 respectively, is included in the balance of debtors, deposits and payments in advance as management considers that the receivable does not form part of the investment cost.

Under US GAAP, amount due from non-controlled subsidiary is included as a component of investment in non-controlled subsidiary.

O Recent accounting pronouncements (i) SFAS No. 123 (revised) In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised), Shared-Based Payment. This Statement requires that the compensation cost relating to share-based payment transactions be recognised in the consolidated financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. Public entities will be required to apply this Statement as of the first interim or annual reporting period that begins after 15 June 2005. This Statement replaces SFAS No. 123 and supersedes APB Opinion 25. The Group has assessed the impact of adopting SFAS No. 123 (revised) and it believed that the adoption of this Statement would not have a material effect to the Company’s consolidated financial statements. MTR CORPORATION LIMITED ANNUAL REPORT 2004 139

O Recent accounting pronouncements (continued) (ii) SFAS No. 153 In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets – an amendment of APB Opinion 29. The guidance in APB Opinion 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be based on the fair value of the assets exchanged. This Statement amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary asset that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement shall be effective for nonmonetary asset exchanges occurring in fiscal periods beginning after 15 June 2005. The Group currently does not have any material nonmonetary transactions that are within the scope of this Statement. Therefore, the application of this Statement will not have material effect to the Company’s consolidated financial statements.

Reconciliation of Net Income to US GAAP

Year Ended 31 December 2003 2004 2004 in $ million HK$ HK$ US$ (Note 1)

Proﬁt for the year in accordance with HK GAAP 4,450 4,496 578 Adjustments required under US GAAP Revenue recognition on property developments (3,522) (385) (50) Depreciation on revalued properties and redevelopment (38) (218) (28) Depreciation on certain ﬁxed assets 10 11 1 Difference in periodic pension cost (74) 6 1 Capitalisation of certain costs (19) (1) – Interest (19) (19) (2) Stock based compensation (19) (6) (1) Derivative instruments (22) 66 9 Other – 2– Deferred tax accounting (15) –– Tax effect of above adjustments 637 (78) (10) Net income for the year in accordance with US GAAP 1,369 3,874 498 Basic and diluted earnings per share HK$0.26 HK$0.73 US$0.09

Reconciliation of Shareholders’ Equity to US GAAP

As of 31 December 2003 2004 2004 in $ million HK$ HK$ US$ (Note 1)

Shareholders’ funds in accordance with HK GAAP 57,292 63,499 8,166 Adjustments required under US GAAP Revenue recognition on property developments (1,360) (1,745) (224) Accumulated depreciation on revalued properties and redevelopment (402) (620) (80) Asset revaluation reserves (6,704) (9,521) (1,224) Accumulated depreciation on certain ﬁxed assets (761) (750) (96) Difference in periodic pension cost (184) (178) (23) Capitalisation of certain costs (1,258) (1,259) (162) Interest 637 618 79 Derivative instruments (366) (167) (21) Other 40 42 5 Deferred tax liabilities 600 561 72 Shareholders’ equity in accordance with US GAAP 47,534 50,480 6,492

Note: 1. For the convenience of readers, the US dollars equivalent was translated at HK$7.7756 which was the Hong Kong closing buying rate quoted from Reuters at 4 pm of 31 December 2004. 140 Glossary

Articles of Association The articles of association of the Company

Board The board of directors of the Company

Company or MTR Corporation Limited（地鐵有限公司）, a company which was incorporated under the Corporation or MTR Companies Ordinance (Chapter 32 of the Laws of Hong Kong) on 26 April 2000.

Computershare Computershare Hong Kong Investor Services Limited

Customer Service Pledge Annually published performance targets in accordance with the Operating Agreement

Director and A member of the Board Member of the Board

FSI The Financial Secretary Incorporated, a corporation solely established under the Financial Secretary Incorporation Ordinance (Chapter 1015 of the Laws of Hong Kong)

Government The government of Hong Kong

Gross Debt-to-equity Ratio Loans, obligations under ﬁnance leases and bank overdrafts as a percentage of the shareholders’ funds

HKSE or Stock Exchange The Stock Exchange of Hong Kong Limited

Hong Kong or The Hong Kong Special Administrative Region of the People’s Republic of China Hong Kong SAR

Interest Cover Operating proﬁt before depreciation divided by gross interest and ﬁnance charges before capitalisation

Listing Rules The Rules Governing the Listing of Securities on the Stock Exchange

MTR Ordinance The Mass Transit Railway Ordinance (Chapter 556 of the Laws of Hong Kong)

MTR Lines Collective name for the Kwun Tong Line, Tsuen Wan Line, Island Line, Tung Chung Line and Tseung Kwan O Line

Net Debt-to-equity Ratio Loans, obligations under ﬁnance leases and bank overdrafts net of cash and cash equivalents in the balance sheet as a percentage of the shareholders’ funds

Octopus Octopus Cards Limited

Operating Agreement The agreement entered into by the Company and the Secretary for Transport for and on behalf of the Government on 30 June, 2000 for the operation of the Mass Transit Railway

Operating Margin Operating proﬁt from railway and related operations before depreciation as a percentage of turnover

Ordinary Shares Ordinary shares of HK$1.00 each in the capital of the Company

Return on Average Proﬁt attributable to shareholders as a percentage of the average of the beginning and closing Shareholders’ Funds shareholders' funds of the period

SEC The U.S. Securities and Exchange Commission

Service Quality Index A measure of customer satisfaction for the services provided by MTR Lines and Airport Express Line based on the service attributes (excluding fares) weighted by the corresponding importance from the customer research 1ST PAGEPROOF 25 years of serving 02 Mar 2005

Vision To be a world class enterprise, growing in Hong Kong

Annual report Annual report and beyond, focusing on rail, property and related businesses Mission > Provide excellent value to our Customers, enhancing

2004 their quality of life, and contributing to development of the communities in which we operate

> Provide opportunities for employees to grow and prosper with the Company and reward our investors

> Develop the rail network as the backbone of public Annual report 2004 transport in Hong Kong > Grow in Mainland China and capture opportunities in Europe by building on our core competencies

MTR Corporation Limited MTR Tower, Telford Plaza, Kowloon Bay, Hong Kong GPO Box 9916, Hong Kong Telephone (852) 2993 2111 Facsimile (852) 2798 8822 www.mtr.com.hk